Good morning, ladies and gentlemen. My name is Carol and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q2 2018 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Greg Dilworth, Vice President of Investor Relations, you may begin your conference.

Thank you, Carol, and good afternoon, everyone. Welcome to Sun Life Financial’s earnings conference call for the second quarter of 2018. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at sunlife.com. We will begin today’s presentation with an overview of our second quarter results by Dean Connor, President and Chief Executive Officer of Sun Life Financial. Following Dean’s remarks, Kevin Strain, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions on today’s call. 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 one 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’ll now turn things over to Dean.

Thanks, Greg, and good morning, everyone. Turning to Slide 4, the company reported underlying net income of $729 million or $1.20 per share. We generated a strong underlying return on equity of 14% and maintained the strong capital ratio and balance sheet with leverage below our target ratio. Sun Life U.S., Asia and MFS each delivered strong earnings growth over last year and our Canadian business delivered good results. In constant currency, insurance sales grew by 15%. Asia individual insurance sales were up 33% and Canadian individual and group insurance sales were up 16%. Wealth and Asset Management sales were down 12% in constant currency from lower sales in Asia and at Sun Life Asset Management, including MFS and our alternatives business, Sun Life Investment Management. For the value of new business or VNB, this quarter, a combination of higher insurance sales volumes and favorable mix of business helped drive a 17% increase in VNB over prior year. Notwithstanding lower wealth sales. With the LICAT ratio of 149% for Sun Life Financial Inc. and a 21.8% financial leverage ratio, we have a strong capital position. Last night, we announced the continuation of our share repurchase program with a non-course issuer bid for up to 14 million common shares. When we consider our strong capital position and the level of cash generated after funding organic growth and dividends, this repurchase program allows us to maintain a strong ROE and leaves us with ample excess capital availability. And this, in turn, allows us to play both the strong defense and a strong offense in the later stages of this economic cycle. During the quarter, we continued to make progress on growing our business, pursuing strategic investments and achieving a number of milestones along the way. In Canada where we’re a leader in…

Thank you, Dean, and good morning to everyone on the call today. Turning to Slide 6, we take a look at the financial results from the second quarter of 2018. We saw strong earnings and ROE results this quarter across the business. Reported earnings were up 23% and reported earnings per share of $1.16 were up 25% reflecting business growth, favorable experience gains and the impact of share repurchase activity over the past year. Reported ROE was 13.5%, up from 13.1% last year. Underlying earnings, which excludes the impact of market factors and assumption changes were $1.20 per share, up 7% over the second quarter of 2017 reflecting strong business growth and favorable morbidity experience in the quarter. These results were achieved against the headwind of a strengthening Canadian dollar, which reduced underlying net income by $22 million relative to the same period a year ago. Our underlying ROE for the quarter was 14% at the upper end of the target range of our medium-term objectives of 12% to 14%. Our capital position continues to be an area of strength. We ended the quarter with a LICAT ratio for Sun Life Financial Inc. of 149%. The LICAT ratio for Sun Life Insurance Company Canada was also strong at 134%. The higher ratio at the SLF level largely reflects the excess cash of $2.6 billion held by SLF Inc. At the board meeting yesterday, we approved the dividend of $350 million to SLF from SLA reflecting the continued strong earnings growth and cash generation at SLA. We repurchased and canceled 3.8 million common shares for the first six months of 2018 at a cost of $206 million. As Dean noted earlier, we announced a continuation of our share repurchase programs with the normal course issuer bid program of up to 14…

Thanks, Kevin. Good morning, everyone. I’m going to spend a few minutes talking to you about MFS outflows in the quarter, provide some perspective relative to what we’re seeing across the industry. As you know, our net flows are a product of two large numbers, and they’re both gross sales as well as redemption activity on behalf of clients. Our gross sales at MFS this quarter were $18.6 billion. That’s down from last quarter where we saw record levels of sales in U.S. retail. This is consistent with U.S. retail industry trends where we saw meaningfully slowdown in net inflows in the quarter. In addition, these flows were also more heavily directed towards fixed income products, which had an unfavorable impact in active equity managers like MFS. Even with that, as rate went up in the quarter, we actually saw fixed income flows come down versus Q1 as well. On the institutional side, we saw elevated levels of outflows in the quarter. Rebalancing with the primary reason given by clients for redemptions, it was not performance-related. There’ve been a number of questions around portfolio manager retirements and what impact that’s having on flows. When you look at those pools of assets relative to the overall book, redemption rates are not meaningfully higher on that. So really is what clients are doing in terms of derisking, rebalancing within the overall plan that’s drove the outflows in the quarter. Broadly across the industry, we do continue to see elevated levels of industry redemption rates, and we’ve talked about this historically. It is something that we don’t believe will persist over the long term. Number of questions as well around capacity and how we’re thinking about capacity. What, I would say, is very carefully managing that, and reopening strategies where appropriate. We currently have 12 strategies or approximately 40% of our assets under some form of capacity constraint. I’ll remind you, our first priority is deliver strong returns to clients. That’s what the capacity constraints are all about and we’ve been able to continue to do that as the assets have grown in those strategies over the last several years. Our view is as long as we’re adding up on behalf of clients. Clients will continue to hire us. We’ve kept strong investment performance to the bull market given the strength of our research platforms. We expect to continue to drive strong performance through the inevitable market correction, wherever that might be. We have to ensure we have the right products on behalf of clients, part of that is offering products that we have today and some of that is building out capabilities that we’ve talked about, and that reflects fixed income. Our view is that we do that successfully, it’s a great business generates high returns, high cash generation, and it will grow earnings through the cycle. So with that as a context, I’ll turn it back to Greg who’ll start the Q&A portion of the call.

Thank you, Mike. To hope 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 re-queue with any additional questions. And with that I’ll now ask Carol to please hold the participants for questions.

Thank you. [Operator Instructions] And our first question today comes from Gabriel Dechaine from National Bank Financial. Please go ahead.

Good morning. Actually, Mike, I want to kick it off with you on the MFS. You talked about the strategies that are – that have been close to new inflows, I think it was 12 funds, and you also alluded to the fact that you are reopening some strategies. Can you dive into that a little bit more? I didn’t get the full picture, I guess, of what exactly you’re doing and how you expect that to evolve over the next little while?

Yes, I mean, we are flexible in terms of restrictions on products. So where there is some ability to relax the restriction on a co-mingler or retail product, we will and have done some of that. What I would say more broadly though is capacity as a function of total asset size that we’re managing across ownership, across strategies, across the organization, size of ownership in terms of what percentage of companies that we own. And then finally, it’s a function of trading volumes in the market. So even as organic asset levels have come down in some of the strategies, these trading volumes that have actually come down pretty dramatically. And so while we can be somewhat flexible with capacity, we don’t think it’s going to be a significant driver of gross sales. We’d look at the overall book. So what we’re doing is diversifying the strategy that have capacity, diversifying into asset classes to see like fixed income that’s a little bit newer for us in that channel. And so we think that it will continue to be somewhat capacity constrained in the equity book that is currently closed, and we need to do is diversify the product set.

And the rebalancing, that’s a term we heard for a number of years in the institutional side, is that really, how much of that rebalancing clients that are – they’ve got too much money for you or however you want to put that, with you, I mean, or versus they’re going to the passive or private equity rather or whatever other alternatives, what’s the mix like there?

We don’t – the institutional channel has been able to buy passive forms of management for decades, and so we don’t see the institutional books significantly impacted by that passive pressure. We are seeing them more on the retail side. The rebalancing really is when you got to big equity book much of it is de-risking. And so in this quarter, in Q2, where interest rates went up and equity markets were actually, depending on where you are around the world, but equities were relatively strong, particularly over a one-year basis we see clients de-risking. And so they sell down equities and they reallocate to fixed income. And so because our institutional book is skewed to equities that have an impact on us. And so it really is what clients are doing in their overall asset allocation relative to what’s happening in MFS.

And apologies to Greg. I’m going sneak one more, a quick one though – and this is for Steve. The mortgage loan investment portfolio, looks like you had roughly $70 million impairment, it’s not a big number, but I just want to understand it a bit more. Is that part of why you didn’t have the credit experience gains you normally do? And what sector and geography was that particular mortgage exposed to?

Hi, Gabriel. It’s Randy Brown, the CIO. So I’ll take that one. The credit experience this quarter was lower, it was really about 1 or 2 idiosyncratic credits went down. So I’d say it’s not anything that represents the broader book. In fact, the broader book is doing quite well. With respect to sector, one, in particular, was a government-related security where loan that went down. So nothing that I would call out there to project forward.

In the U.S., I imagined?

No.

Thank you.

Welcome.

Our next question comes from Humphrey Lee from Dowling & Partners. Please go ahead.

Good morning and thank you for taking my questions. Just to follow-up on MFS. So you talked about what you saw in the quarter. Maybe can you talk a little bit about like what have you seen since the quarter end? How’s the pipeline shaping up for the balance of the year?

Humphrey, we don’t – as historically been the case, we’re not going to talk a lot about what we’re currently seeing, what our expectations are in flows. What I would say more broadly is if you look in July and you look at industry flows, they don’t look dissimilar from what we saw in Q2. And so irrespective of the fact that the market sort of approaching and making new – all-time highs, at least here in the U.S., is the trade backdrop has clearly got people cautious, sitting on their hands a little bit, and if you look at flows derisking to some extent. And so if the backdrop remains as it is, we would expect that Q2 from an industry perspective would continue to look the same. We do think that Q2 from an institutional side was more outsized. If you look historically, that’s been the case. Occasionally, you get hit in a quarter by redemptions that are higher than you would anticipate cross-cycle and so the retail environment doesn’t look significantly dissimilar. The institutional environment, we think, was outsized in Q2.

Got it. And then can you talk a little bit more – or give us an update on those new strategies that you have rolled out over the past couple of years like the blended research, the fixed income effort. Like what is the – what are the size of those strategies right now in terms of AUM and – can you just give an update on those?

Yes. It’s broader than – broadly diversified. Where we are capacity unconstrained – emerging market equities, regional equities, mid- and small-cap equities, those are strategies that have long-term track records, strength of management teams, stability of management teams, and so we’re actively offering those into the marketplace. Blended research we’ve had now for a number of years, and those were positioning relative to some of the passive or quasi-passive alternatives. And then fixed income our strategies that are now a number of years older. And we’re in the process of getting consultant ratings, getting them in front of prospects, starting the sales process. The institutional sales process is a much longer process than the retail sales process. And so on the retail channel this year, fixed income sales represent about 1/4 of our sales. So we’re well known in the U.S. as a fixed income manager. What we need to do is create that same brand and product identity outside of the U.S. as well. We’re in that process. It’s going to take us some time. We’ve had some traction, but we’re – it’s relatively nascent from an institutional perspective. And if you look at the overall assets of the firm, fixed income represents about 20%. We want to make that substantially higher over the next three, five and 10 years.

Got it. Thank you.

Our next question comes from Meny Grauman from Cormark Securities. Please go ahead.

Hi, good morning. Just a question on nonmarket experience gains, a good result. Just wondering if you could you remind us sort of what you view as more of a run rate when it comes to that specifically.

Hi. Meny, it’s Kevin Morrissey, thanks for the question. We really don’t think of the nonmarket experience in terms of run rate. They’re quite variable, they go up and down. We sometimes see longer-term trends. But in any given quarter, they’re up and down. This quarter, overall, it was net positive experience. So we’re pleased to see that.

I guess, put another way, is there anything in there this quarter that you would highlight as being unusual or not sustainable in your view?

Maybe I’ll highlight the morbidity gains. The morbidity gains for the quarter were quite strong. About half of that was in Canada and about half of that in the U.S. In Canada, we had positive morbidity experience related to drug claims and LTD incidents. We also – in the U.S., most of that was driven by the stop-loss business. So I’d say it was significantly positive. I wouldn’t think of that as kind of a run rate. So that would be one I’d call out as being probably over longer-term expectations.

Thank you.

Our next question comes from David Motemaden from Evercore ISI. Please go ahead.

Hi, thank you. Just I have a question on your capital position and just thinking about your dry powder that you have for deal whether that’s excess at holding company debt capacity? And maybe even any of your view of excess within SLA. Just wondered if you could comment on that. And then I guess just any update on your acquisition strategies, particularly within Asia will be helpful.

David, it’s Dean. Thank you for the question. Kevin will talk about the first part, then I’ll comment on the second part of it.

So we had excess cash of $2.6 billion at the holdco level at the end of the quarter. And this reflects the strong capital position and the strong LICAT ratio. SLA increased its LICAT ratio to 134% this quarter. And our board, as I mentioned in my remarks, approved the dividend of $350 million from SLF to SLA, which would increase our excess cash to just over $3 billion and reduce the LICAT ratio at SLA back down to the 132%. And as you know, our leverage ratio, we disclosed that around 20.8%, so.

Yes, and just one last point on the leverage. As you may know, each point of leverage, and we’re just a little lower than 22%. But each point is about $300 million of debt capacity. There is – to get us back to a 25% leverage ratio, that’s circa $1 billion. So on your question, David, around M&A strategy, if you look – the best way to look forward is actually to look backwards, it’s what we’ve done. What we’ve done in the past four, five years. We’ve deployed around $2.5 billion of capital towards acquisitions across all four pillars. And the criteria we have are first of all, the business has to fit the strategy. It has to fit the four-pillar strategy. We ask ourselves, what do we bring to this business beyond a checkbook? How do we – how do our capabilities help lift this business up and vice versa. How does this business when we add it to our existing platform, how does it actually accelerate the growth not just make it bigger but actually, help us grow faster. It also obviously has to tick the box in terms hurdle rate. The long-term leverage ROE has to clear our hurdle rate. And on that sense, we’ve remain disciplined as we deployed capital. I would say to you that we’re very active, continue to be active at seeking out opportunities. The average gestation period is measured usually in years, not months, in terms of when we start talking to somebody to when we can actually make something happen. But I would – one thing I would tell you is that we’re spending a tremendous amount of time as we have over the past number of years out talking to acquisition targets and candidates. And I think we’ve been pretty disciplined at it and we’ll continue to be.

Great, thanks. And then just a question in Group Benefits in the U.S. where the margin remains strong, I understand this quarter, there was some morbidity experience that was a bit favorable. But even taking that out, you’re still at the high end of the range. Do you think that this is a sustainable level that we can operate at going forward? And also I guess, just any commentary you have on new business pricing and any pressure there, because it seems like the industry is also experiencing peak margins in that business?

Yes. We had set out a target margin of 5% to 6% and remember, we also have a 75 basis point tailwind that will phase-in during the year because it’s a trailing 12 months basis from U.S. tax reform. So we’re very pleased with the 6.5% number this quarter. And that’s pushing up against the high-end of the range if you adjust for tax reform. As you mentioned, we did have some favorable morbidity in stop-loss. We actually had some unfavorable morbidity in our disability line. And we’ll expect to see those items fluctuate over time. However, overall, we are continuing to build margin. Pricing is strong. We’ve been being able to get good increases both in the group business and in the stop-loss business. We’re achieving our new pricing, especially in the stop-loss business where our position remains very strong. So overall, we think we’ll be able to remain in the range that we had set out previously.

Great, thanks. And maybe if I could just to sneak one in for Mike. Just on MFS, and I know you guys give the, I guess, funds that are in the top half on a 3, 5 and 10-year basis. Just wondering if you have those on the top quartile basis?

Yes. I don’t have it in front of me. So we can certainly provide that after the call.

Okay, great. Thanks so much.

Our next question comes from Steve Theriault from Eight Capital. Please go ahead.

Thanks so much. Couple of questions. Maybe starting with MFS, so Mike, the one thing that I was curious about was U.S. equity markets were strong. So I was surprised to see that the market movement impact on AUM was such a modest positive this quarter. And I think when I look across institutional and retail, it was $3.5 billion. In quarters like where we’ve seen like the S&P 500 was up a few percent this past quarter. In those types of quarters, we often see $15 billion, $25 billion of market movement. So why is it lower this quarter?

If you look at the non-U.S. markets in 2Q, U.S. markets were up over 2% and non-U.S. market, if you look at the MSCI, so it was actually down over 2%. So it’s a significant bifurcation in markets during that quarter that would drive the vast majority of that difference.

Okay. And just a follow-up on Gabe’s question, question. If rebalancing is a function of derisking big equity books, as you mentioned and answered to his question, should we expect this issue broadly to potentially worsen the longer the current bull market persist? Or do you think this is as bad as it gets in kind of a rough bumpy quarter?

It’s pretty hard to say given that every clients got different funding ratios and asset allocation. I mean, if you look at prior quarters, even during – if you look over the last year, even periods where the equity market had relatively strong periods, we didn’t see the same derisking activity. And so I think it’s very hard to predict. And so we have a very difficult time ourselves trying to understand what it could mean, and certainly trying to give you any comfort around that as well. The bigger issue is I think if you saw a significant spike in interest rates, that could drive a derisking – more of the derisking activity. But I think you’ll need a pretty sizable increase to drive significant derisking from here.

Okay, thanks for that. And then on turning to Canada, for Jacques I think, looking at Canadian insurance sales. The mix has been more third-party versus career agency, the last couple of years and I think that’s been part of the plan. So a couple of questions. The career agency forces down about 350 over the last year. Are you managing that lower from here or we starting – is that going to start to level off at this point? And then secondly, we’re hearing about the reentry of one of your large competitors into the power space. Does that give you much, if any, pause, do you think there’s much in the way of vulnerability on the market share front, especially given your momentum has been quite good in third-party the last couple of years?

Thanks for the question, Steve. In terms of the overall distribution for interims, I’d start by saying that fundamentally, we’re more focused on outcomes than the actual number of advisors, although that’s important. We’re seeing good outcomes across the board. And as pointed out by Dean, our interim sales are leading the market for the fifth consecutive quarters. So we’re pleased with that. Both channels remain strategic for us. As we said, we’ve seen nice growth in third-party. I think I mentioned in the previous call that we’re really looking at what I would describe as an omni-channel strategy. So it’s not just about our own sales force and the third-party, but also how do we use technology and digital to engage with clients. So overall, not any to change from prior. Your question about our competitor, I mean, we always watch what competitors are doing. They had been out of the power market for a number of years. We’ve been strong there. It’s probably a bit too early at this stage to point out to what steps doing to sell. We continue to good results, as you know. So something to watch, obviously it’s important. But nothing major at this stage.

Thanks for that.

Our next question comes from Sumit Malhotra from Scotia Capital. Please go ahead.

Thanks and good morning. Mike, I missed some of your prepared remarks to jump off the line, so I apologize if you addressed this. But with MFS – I wanted to ask a question about revenue. On the U.S. dollar basis, I see on a year-over-year basis, average assets are up about – or average AUM is up about 6%, but the revenue growth is only 1%. Obviously there’s a lot of talk right now in the industry about fee compression and some more moves recently. So is that where we’re seeing an exaggerated way here or is there another item that impacted revenue? And if you wouldn’t mind maybe we talk a little bit about flows, but some of these recent actions we’ve seen from some of your large competitors at least on the index or ETF side. What is your view on the impact that has on MFS’ pricing power?

Yes. The biggest delta between – that year-over-year would be lower performance fees would have driven some of that and then some lower sales revenue on A shares would have driven some of that as well on the revenue line. As to fees, it’s been pretty consistent over the last – really, four or five year now on the active side where we’ve seen fees decay across the industry about 1.5% a year. We’ve not the seen that accelerate. And so we’re planning for continued fee erosion over a longer period of time. We don’t see anything that would catalyze at least at the moment, that will occur faster. We’ve number of questions around what Fidelity’s move and what that can do to pricing in any industry. Clients make a decision around where they want to be active or passive, and that’s clearly going to have an impact on the passive players. We don’t believe that, that fee move is going to substantially change the fee dynamic on the active side. And so we continue to think that firms are going to have to being at scale like we are, it’s incredibly important in this environment and running discretionary expenses well, which we have been able to do will allow us to maintain decent margins to the cycle.

Particularly as you’ve made some reference to rebalancing and the efforts that MFS has made to add scale or add capacity to your fixed income operation. Is it reasonable to expect that revenue growth for the unit is going to trail the level of AUM growth we see going forward?

Over a longer period of time, as we ramped up fixed income, that’s correct.

All right. What about the other part of the Asset Management operations, the investment management. We don’t talk too much about this business given that smaller size. But I did notice the earnings contribution dropped off pretty noticeably this quarter from what had been a steady run rate. You did have an Investor Day for this a few years ago, you talked about getting earnings up to around the $60 million range by 2020. We’re obviously, trailing that right now. What happened this quarter and maybe this one’s for Dean. You said what’s happened in the past is a good indicator for what happens going forward. That was on the buyback. But the last time you were in a very strong capital position you also did allocate or deployed capital towards investments in this space. Is that 2020 objective achievable without further acquisitions in this area?

Hi, this is Steve Peacher, I’ll take the first question. In terms of earnings at Sun Life Investment Management for the quarter, we had some basically one, one-time expense that’s nonrecurring that accounts for the earnings decline. But for that expense, we would have been on par with last year in recent results. So it was really a one-time expense. And I would say in terms of growth toward longer-term targets, we’re very pleased. Every business that we bought or started, assets have grown meaningfully. If you look at AUM just over the last 12 months, AUM is up over 9% and over 25% on a two-year basis. And I think we’ve had quarterly positive flows now for – since we’ve started. So we’ve got aggressive targets out there, but I’m very happy with the momentum that we’ve got in terms of new sales and also importantly investment performance, which continues to be strong across the board.

And Sumit, it’s Dean. I mean, I would just say regarding the 2020 goals, they’re still out there. Steve and his team are still accountable for those goals. And I think there’s – as Steve said, we’re pleased with the progress on assets under management growth. We have been investing in distribution to help build out those sales and to help get the AUM base and the net income base up by 2020 and beyond. And so we continue to be very focused on those goals.

And they’re achievable without – organically, without further acquisitions.

Yes, that’s definitely our goal. One of the things that we’ve done, for example, within Ryan Labs is brought in a – lifted out a team with an expertise in leveraged loans. So we think there could be continued opportunities to do that. But I really view that as trying to bootstrap the existing platform organically. At the same time, we’re also looking at acquisition opportunities. We think our goal for this business ultimately is to be many multiples of the size it currently is, and I think that will be a function of organic and inorganic growth.

Thanks.

Our next question comes from Paul Holden from CIBC. Please go ahead.

Thank you, good morning. So first question is related to the U.S. group business. So given where margins are today, it seemed like top line growth should return for this business. Employee Benefits, if just look at the in-force numbers, still down Q-over-Q but the pace of decline is slowing. Should we expect that Employee Benefits business to return to growth going forward?

Yes. As you noted, especially the most recent couple of quarters, it’s pretty much flattening out on the BIF. As you know, we’ve been very disciplined about pricing. That was the choice we made, was to make sure that we were pricing both new business and renewals at the right place and we’ve made that trade-off against some growth for a period of time. The business is stabilizing. I would also point out though that we’ve been converting business from the acquired Assurant Employee Benefits platform. And of course, there were some losses that would be expected from those conversions, but we’re actually seeing those lapses lower or better than what we had modeled in the transaction. So as we get through the conversions and get fully through our pricing actions, we would expect to see the Employee Benefits business continue to grow. And then combined with the stop-loss growth, which is 22% at this year – at this point year-over-year, we think the components will combine for a good growth trajectory.

Great. Thanks for that. And then second question, this one’s probably more for Dean. Given the excess capital you have, M&A is arguably the most important part of the story today. Given some, call it, dislocations or changes in valuations and emerging markets, including Asia, with Trump trade policy and just given what we’re seeing with some of the publicly-traded names, are you seeing any improved opportunities for capital deployment in that part of the world?

Paul, it’s – first of all, obviously we can’t talk about any specific opportunities. I would say that as we look around the world, assets are still at the higher end of valuation ranges. You see this in PE transactions, you see this in all kinds of – through all kinds lenses. So we haven’t – as we look around the world, we haven’t found any bargain basements. What we are looking at, and talking about our good businesses, where something’s changed or might change in the eyes of the owner, the current owner, in terms of the fit within their organization for that business, whether it continues to be a strategic fit, whether they have the capital to grow it appropriately, there’s all kinds of reasons why somebody might want to sell a good business. So we’re focused on strategic fit. We’re focused on strong businesses and we’re focused on those conversations. As I said earlier, the gestation period is measured in years, not months. Those kind of conversations where we can build up a relationship and be viewed as a really great home for those businesses. And I would say, the transactions we’ve done over the last number of years fit that bill, and that’s the kind of thing we’re looking for.

Got it. Thank you for your answers.

Our next question comes from Tom MacKinnon from BMO Capital. Please go ahead.

Yes, thanks, good morning. Just a couple of questions. One with respect to MFS margins. Noticed some seasonality looking historically in this. In 2016 and in 2017, the margins in the second half are better than the first half. Is there any kind of seasonality with respect to – I know in the first quarter, you do some more incentive comp payments. Does that generally kind move itself into the second quarter as well? Or is there any other reason why we would expect a bit of seasonality in terms of your margins?

Yes. No, that’s true, Tom. It’s just the seasonality on stock vesting. So accelerates stock vesting that we see happen in both Q1 and Q2.

Okay. So is that…

So you should expect – if you look over the last couple of years, you should expect, all else being equal, you should expect margin to look similar year-on-year versus what we’ve seen in prior years.

Okay. That’s helpful. And with respect to Canada. The earnings on the surplus in the quarter looked a – $29 million, looked a lot lower than the kind of average that sort of been north of $40 million over the last eight or nine quarters. Is there – was there anything that was driving that?

It’s Randy, Tom. So let me try and take that. No, there’s no real key driver there. I would say there’s some lumpiness in the numbers quarter-to-quarter. But I would say, there’s nothing that I would extrapolate from that particular – this particular quarter versus others.

No AFS gains that were losses or anything like that or – in that number?

Just checking the – no. No, the numbers are really somewhat in line.

Okay. And then finally, the strain in Asia was just negative 10 and better than you’ve sort have been running. And now you’ve got increased scale on your Asian operations. So naturally, this should help probably improve product mix. But was there any particular noise in this quarter, mainly in light of the international operations and how should we’ll be looking at that strain number going forward?

Tom, it’s Claude Accum. The strain last year was minus $29 million. It’s minus $10 million this year, an improvement of $19 million. Most of that’s due to international. It comes from a small number of higher profit sales. So that part – that gain, we don’t expect that to repeat or continue. They could up or down from international. So I guess, you’re right, it is part of International. But you’re right about the direction. Our goal is to take new business gains to much more improved level in this direction, but that will take pace more over a small number of years.

Okay. So it’s something in the line of the way it was last year but possibly a little bit better than last year but not – don’t certainly continue certainly continue at this kind of trend.

Yes, our strategic goal is to take that line closer to zero over four or five-year pacing.

Okay. Thanks for that.

Our next question comes from Doug Young from Desjardins. Please go ahead.

Good morning. Just maybe first, Dean or Kevin. I mean, the underlying ROE, 14%. Is it despite the excess capital, low debt to cap? I mean, if I remove the excess holdco cash, I get closer to 16%. Then I guess there’s morbidity improvement that came through this quarter, but your debt-to-cap obviously is lower than the efficient area or region it would be in. So like the 15% to 16% seem like a reasonable range if you’re able to deploy the excess capital. Or am I missing something in this whole thought process?

Hi, Doug, why don’t I start with that. And of course, it’s – the ratio you’re going to earn is going to depend on how we’ve deployed it and where we’ve deployed it and be quite specific. And a lot of the M&A activity can take time to come into income as you see integration costs and sort of build-up. Our ROE is strong, and we do see all four businesses performing well from an ROE perspective this quarter. And something we’re very focused on is the efficient deployment of capital and the returns of the ROE. So I wouldn’t want to speculate on what we’re going to deploy that at. But we are going to deploy it in ways that is accretive to ROE over a long-term period. It’s just kind of how quickly you can deploy it in a way that’s effective, and then how those earnings emerge over time.

And Doug, it’s Dean. I would just add that if you look at our mix of business, and we’ve worked very hard on this over the past number of years, we – pretty substantial change in the mix of business away from capital-heavy businesses to capital-lighter businesses, which generally have higher ROEs. And I think – so if you think about the mix of business as – moved the balance sheet forward through time, you’re going to end up in a different mix that fundamentally has higher ROEs built into it. So – and it’s kind of behind your question, but it’s worth repeating that LICAT – the move to LICAT, which was and is a more risk-based capital system, has benefited Sun Life because of the significant changes we’ve made in the mix of business, including the sale of the variable annuity business in 2013. So this is coming through, and it’s coming through in terms of – as an example, the ability to move capital up from Canada, which is why it’s punching through 14% as the ROE. So anyway, we – this is a great part of the Sun Life story. We’re really pleased with this. And thank you for kind of pointing out the potential that’s there.

I guess that takes me to my second question, Dean. If you look at valuation, if I exclude MFS, if I exclude excess cap – so I mean, where Sun Life’s trading at, what I would think as an interesting valuation multiple. I mean, M&A is slow to develop and you generate a nice amount of capital every year as well, why wouldn’t you be more aggressive on the buyback?

Well, I think by continuing the NCIB and in fact ramping it at – to 14 million shares, we are indicating the fact that we intended to – we have the ability to and the intent to deploy more capital over the next 12 months towards buybacks. I think that as you look back, we’ve bought back around 380 million shares in the year we’ve just – or $380 million worth of shares in the year we’ve just finished. And that was the less than the total that we had allocated towards that. But nonetheless, it was a significant deployment of capital towards that. And the – as I said, the $14 million NCIB share, NCIB we announced last night, is indicative of our intent to be somewhat more aggressive in allocating capital towards this.

Okay. Thank you.

And we have no further questions in queue. I’ll turn the call back for closing remarks.

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

This concludes today’s conference. You may now disconnect.