Good morning, ladies and gentlemen, my name is Chris, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q4 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.

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

Thanks, Greg, and good morning, everyone. Turning to slide 4, the company reported underlying earnings of $718 million for the quarter, up 12% over Q4 of the prior year, with particular strength in the U.S. and Asia. We generated an underlying return on equity of 13.6% for the quarter and continued to deploy capital in a disciplined way, including the announcement of the GreenOak Real Estate transaction and the repurchase of 5 million common shares. We grew insurance sales by 19% over Q4 of the prior year and wealth sales were up 3%. The value of new business or VNB grew by 17% over prior year on sales growth, better product mix and pricing decisions. Our results this quarter and for 2018 overall reflects strong execution on the drivers of profitable growth and on innovation. In Canada, we grew Q4 underlying net income by 6% over prior year. We launched Lumino Health, the first of its kind digital health network. Lumino takes many of the features that are available to our Canadian group plan members, such as provider ratings, cost comparisons and health tips and makes them accessible to all Canadians. We're also using digital innovations to help clients save and achieve lifetime financial security. And in 2018, we presented almost 10 million digital nudges to our plan members through our digital coach Ella, informing them about savings opportunities are areas where they're leaving money on the table. And as one outcome, clients increased their additional in-plan deposits with us by 24% to over $900 million last year. Clients are telling us that they like these nudges, which help them get more from their benefit plans and give them timely and relevant advice and actions that they can take. Turning to the U.S., we grew underlying net income in the…

Thanks, Dean, and good morning, everyone. Turning to slide 7, we take a look at the financial results from the fourth quarter of 2018. Continuing the momentum from the first three quarters of the year, we've branded out the fourth quarter with strong earnings and strong return on equity. Reported net income of $580 million was up from $207 million in the prior year. Reported net income this quarter reflect the charge of $153 million after tax, the market-related impact, driven by the drop in equity markets and interest rates in the quarter. Q4 2017 reported net income reflected a $251 million charge taken related to the enactment of the U.S. tax reform as well as negative $57 million after-tax related to market impacts. Underlying earnings were $718 million or $1.19 per share, which is up 13% from the same quarter last year. Underlying earnings growth across our businesses driven by the lower tax rate in the U.S., favorable expense experience as a result of continued expense management as well as other experience gained, partially offset by unfavorable mortality and morbidity experience in the quarter. Our underlying ROE of 13.6% was at the upper end of our target range for our medium-term objective of 12% to 14%. We maintained a strong capital position with a LICAT ratio of 144% for Sun Life Financial Inc. at SLF, and 131% for Sun Life Insurance Company of Canada. The higher ratio at the SLF level largely reflects the excess cash of $2.5 billion held by SLF Inc. Our leverage ratio of 21.2% remains lower long-term target of 25% and is another potential source of cash for capital deployment. We also saw strong growth in our book value per share this quarter, up 9% over the prior year $35.84, reflecting the growth in income,…

Thanks, Kevin. To help ensure that all our participants have an opportunity to ask questions today's call, I'd ask that each of you please limit yourself to one or two questions, and then requeue with any additional question. With that, I'll now ask Chris to please poll the participants for questions.

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

Thanks very much. Couple of things for me, please. First, if we can turn to MFS expenses, as you look at this year, expenses -- I think the low watermark for expenses was Q4 relative to Qs 1, 2 and 3 and last year Q4 was the high watermark, and I won't be surprised to have you tell me that you reined in expenses on the back of the challenging markets. But going forward, I'd be interested, because I would have expected normally Q4 would have been a seasonally high quarter for expenses, given where asset levels ended the year and we can see the January numbers for MFS, is that sort of run rate of 450 doable in '19? How much flexibility is there on that expense run rate to whether, lower AUM and support the margin and all that good stuff? Thanks.

Good morning, Steve. This is Mike Roberge. Yeah, the biggest factor if you look year-over-year in terms of the expense change would be the IFRS fair value adjustment on share-based comp. And so much of that's related to the market and what happens to the share price. So all else being equal, we would expect that isn't something that's going to be recurring. So that's a piece of it. The other piece of it, which is about half of it is lower formulary comp and some things that we did and actions that we can around comp -- compensation, as well as lower dealer trails on share classes that we sold to advisors, so the vast majority of it is the fair value adjustment, which is something that we would expect not to be recurring.

And when you say half of it, that's the 450 versus 550 year-on-year?

No, I'm looking at that delta.

Or the 450 versus 550 quarter-on-quarter?

No, it would be delta between the quarters -- year-over-year.

Bunch of quarters, -- sorry, or the year-on-year quarter?

Year-on-year -- I was giving year-on-year, but the same thing would be true, if you actually looked Q3 to Q4 as well. The vast majority of it was the fair value adjustment.

Okay. And then second thing for me. Just a question on Canada and on par and we're hearing a lot from one of your competitors who has re-entered the market. The disclosure doesn't allow us from what I can see any way to drill down too far, but it doesn't look from your individual insurance sales in Canada that you're getting the Western part of that some of your other competitors and competitors who have been out of the market, competitors who have long been in the market are seeing. So can we get a little color there and maybe you can give us the mix or the growth rate in par and if there is a discrepancy versus what we're seeing elsewhere? Is it just -- are you seating some natural share with the re-entry of the competitor, just some color there would be helpful.

Thanks, Steve. This is Jacques and thank you for the question. I can't quite comment on what the competitors are doing. Ours is a popular product, particularly in the high network or prime network channel in the third party. As you pointed out, we've been more -- we've been a consistent player, if you like, over the years there and what we're hearing is that our product is attractive and is conservative because of our consistent programs, we have those partnership with third-party channels and right now, we're not seeing slowdown in our sales. So, we feel pretty good overall.

So you're not seeing the slowdown, could you give us a sense of what parties relative to total insurance sales?

If you look -- so in the third party, it's mostly par. You can remember the tax changes that affected Q4 '16 and Q1 '17. If you factor that out because this was kind of a one-off event in the industry, our par sales have grown over 2018.

Okay, thanks for that.

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

Good morning and thank you for taking my questions. Looking at in Asia, it is definitely nice to see a rebound in underlying net income kind of sequentially, but the expected profits from in-force were lower quarter-over-quarter. And I was just wondering if you can provide some color on what happened in Asia this quarter? And then is the fourth quarter level a new run rate for the expected profit?

Humphrey, this is Claude Alam Accum. The best way to look at expected profit is actually year-over-year or 12 months versus 12 months prior, sequentially what you saw in Q3 to Q4 is some FX movement, some declines in the equity markets in Asia. A good part of the expected profit is on funds. But if you look at 12 months this year versus 12 months of last year, that's a better robust barometer of our expected profit and is up 20%.

Got it, and then shifting gears, in U.S. Group Benefits, your employee benefit sales looks very strong in the quarter with a huge pickup. I think with the double-digit sales in the fourth quarter for employee benefits is definitely a first for you guys since the transaction. I was just wondering if you can provide some colors in terms of what you saw in the quarter and what drove the strong performance?

Sure. Thanks, Humphrey, this is Dan Fishbein. Just a quick reminder that the way we record sales in our result is the effective date, 1/1 sales are recorded when they are made, which is in the fourth quarter. So the fourth quarter is our biggest sales quarter of the year. We saw quite strong results across all of the businesses in the fourth quarter up significantly over last year. That was certainly led by stop-loss which had very strong sales in the quarter and in the year and that's continuing our momentum in that business. What's driving the sales there is, we are executing well with our relationships, with partnerships, with third-party administrators, they also have gotten good sales lift from a couple of captive relationship and a significant uptick in sales from our key broker and benefits consultant partners. We also had a significant increase in our Group sales in life and disability up year-over-year, also quite pleased that we had 37% increase year-over-year in our worksite sales, which is very important to our future. And then finally, in DRMS, sales were up significantly as well. So it was really across all of our businesses that enabled us to get to that $1 billion level for the year.

I guess on the Group sales, as we're kind of I find it a little bit surprising because -- but from some of the comments and your peers comment, but overall industry wide sales were a little bit lighter, because there's less business coming to the market bid and there is definitely a little bit also better persistency across the industry, while sales were down a little bit or little the softer. So that's why I was little bit surprised to see the strong sales results in the Group business for you guys in the fourth quarter.

Yes. I can comment on that, Humphrey. First of all, there is that point of we record the 1/1 sales in the fourth quarter and most of our competitors do not, so we may have a little bit of a timing comparison issue there. But in our Group sales, we also saw a significant uptick year-over-year in our national account sales, which as you know is an area that we've really been focusing on, building out a dedicated unit and team to focus on that and that was a major contributor to the growth in that as well as I mentioned good momentum in our worksite sales as well.

Got it, thank you for the color.

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

Hi, good morning. The investment in Bowtie Life kind of got my attention, just sort of a bigger picture question about your appetite to invest further in digital distribution across your regions and more broadly, how you -- how significant you think digital distribution can become over a reasonable period of time?

Meny, it's Dean. Thanks for the question. I think here, you're right to call it out as an important innovation. I think, what we think is important is to experiment and to try new forms of distribution and Bowtie is clearly in that category. We've had lots of practice at this in Canada where we have been distributing a term life Insurance digitally for a number of years and with lots of learnings from that and lots of learnings, as you know, through the group platform and digitally nudging and digitally selling extensions of coverage, and additional coverage to our clients and client numbers. And another version of that, another way of experimenting with that is in the United States, the acquisition of Maxwell Health, which is a really first-rate digital platform to not just enroll people in their benefit plans, but to engage them in making decisions and adjusting those decisions as things change in their lives, and we're in the process of rolling that out this year to Sun Life clients who are excited about that because that will provide another form of digital connection to end users. And then the last example I would give you is, back in Asia, as you know, we've been working with a number of telcos in different markets to distribute simple products, easily bought to mobile subscribers who can buy it on their handheld devices, and that's we've learned a lot and we've added quite a few clients through that. All of these digital experiments, I would say, are still early days. I think it's really -- what's really important is that we are out there testing, learning, building and in some cases, we're seeing some meaningful traction.

What share of business is distributed digitally now in the ballpark figure, if you have them?

It's -- for the industry, it's very small, globally, very small. And in case of Sun Life, it's small as well. But I think you'll see in the future more growth in digital distribution. I think the biggest opportunity is where you've got a combination of digital distribution and advice whether that's from an advisor or through other forms advice combining to help people get the solutions they need. And it might start with the digital distribution call and end up with the call to the call center or a meeting with one of our advisors to actually get something done for that client. So I think what will be challenging is to parse the role of digital between pure digital sales versus the lift in other sales. But I think we're excited about it, we're investing in it and we think it's got a big future for us.

Thank you.

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

Thank you. Good morning. First question is for is for Kevin. Just looking at the experience gains in the quarter and specifically, the line that you've broken out now other, which is attributed largely to project spending. Just want to make sure I understand how this works, because you separated the project spend from what I guess is run rate or core expenses at some point this year. When you book a gain related to project spend, is that as simple as your assumptions embed a forecast for what that spend will be in a given quarter? And if you come in lower than that, you book a gain or is there something more significant that play in terms of that particular line?

Sumit, this is Kevin Morrissey. Thanks for the question. In the other experience gains, we have -- as you've noted, we've included some of the project cost. And so those are in the shorter term projects and initiatives. And what we've included in that line would be the full cost of those projects charge. So that's not a variance versus a planned budget number.

So in this quarter when that's listed as a gain, I think it's $44 million after tax, so what is the driver of that Kevin?

Yeah, so that's a good question, because those underlying costs are in there. We did see a positive number, that was higher than we would be normally expected. It was really -- it wasn't one big thing, but it was several smaller items. Individually, they weren't significant, but taken together they did add up in the quarter. I'll give you a rough split of how that breaks out. About a third of that was related to policy administration uptake in Canada. This is part of a normal review that resulted in a true up to claims. Importantly, there was no impact to claims there. About a third of it was a reinsurance review in the U.S., as part of the normal review, if you take a look at both premiums and claims on that plan and that did result in small liability adjustment. That was not an actual liability, so that's why it wasn't part of the ACMA line. About a third of that was favorable joint venture experience, and there were several smaller items, joint ventures in China, Malaysia. Example would be an IBNR in course of payment review liability, small relief there in China.

Okay. So that's actually really good detail because I think the line has the footnote related to projects spend. It sounds like the gain in the quarter, if I can call it that is actually related more to other factors?

That's right, yes.

All right. Now to the actual business. And my question is going to be for Dan. Dan, I don't want to front run the Investor Day too much, but obviously the uptick in your profit margins in the U.S. business has been one of the good news stories for the companies for a couple of years now. If I think back over the last few years and the factors that you had highlighted for this business, it was obviously the synergies post assurance. There were some of the claims improvements that you're hoping to enact or looking to enact in stop-loss and the pricing increases, everything has gone very well, as far as our business is concerned, including the U.S. economy. So I think a lot of that has now been baked in. My question here would be, when you look at a profit margin approaching 7%, what are the next factors and maybe I'll save the number for next month, unless you want to give it to me now, but what operationally is your team looking at in terms of the next drivers for further expansion in margins in the U.S. business?

Thanks. Sumit. I think you described it very well. We're obviously at the top of the range that we set out at the last Investor Day, one to two years early, even after adjusting for the impact of U.S. tax reform. So where do we go from here. So first, a couple of comments on where we are right now. We have been experiencing quite good results in our stop-loss business actually better than our pricing targets. So that's something we have to keep in mind, that should normalize through our pricing targets over time. At the same time, we're not yet at our full target for our group business, particularly in stability. So we definitely have more room there to improve the margins as we complete the work on pricing actions that runs through the entire book, as well as improve claims management and some continued expense management. You're right, of course, that we are now mostly done with the synergies from Assurant transaction. Although we still have some impact left to go as we convert the remainder of the business this year. Our primary way of thinking about growth in margins going forward is there is still some room for just basic performance improvement, as I mentioned. We also have market growth, sometimes I think we focus on the 3% to 4% growth that's typically attributed to the group space, but a good portion of our business is in the healthcare space, it's about 45% with stop-loss and dental. And that's a business that grows at a considerably greater rate in terms of the market growth rate, at least twice that of the more traditional ancillary business. And then when we layer on top of that our work, you closed coverage gap and get people more coverage even within our existing client base through tools like Maxwell, which will pull people in a more direct ongoing and intimate way through our recommendations and information and dialog about coverage. We think we can significantly increase the size of the business, even within the current block. So when we add all that together, there's still quite a bit of opportunity for earnings growth. But as you said, we're not going to comment on a new target until Investor Day, we will have a new target, but we'll talk more about that in March.

I'll look forward to that. My last one and I'll try to keep it quick is for Dean. Dean, you referenced it and I think we can all see on many different measures your capital and balance sheet flexibility is at the very high end of the sector. You've probably been at least in my view the most balanced when it comes to capital deployment via acquisitions, dividends, buybacks, divesting in the business. Some of your counterparts in the sector are increasing their share repurchase activity to levels or to percentages of the share count that's higher than we normally see in this sector. I'm just wondering conceptually, do you view given where valuations are right now, increasing the buyback as a preferred option or potential option for Sun Life and its shareholders? Or are you more focused in deploying capital back into the business and adding scale via acquisitions? How does that balance work for you conceptually?

Sumit, thanks for the question. And you're right to describe our approach as a balanced approach and both offense and defense and we're in the fortunate position of being able to do both. So $2.5 billion of excess cash as Kevin described in strong LICAT ratio, leverage ratio at 21.2%, dry powder, so all of that gives us some good capacity as we explore M&A opportunities. We've got, as I mentioned, some further dry powder on our balance sheets, liquidity that can be invested in investment opportunities. That's another form of offense that we think about and actively plan for and manage. Strong dividend payout with the yield that's now north of 4%. And on top of that, we can generate enough free cash flow to buyback seven day $100 million a year stock, which is the NCIB we announced last August and are actively pursuing. You would have noted that since we announced that $14 million program last August, up to December 31, we did so after 4.5 months, we'd executed about 60% of that program and that pace continues in Q1. So I think we've got, I think we've got a good balanced mix that is allocating capital in a smart way and a balanced way, but thinking about shareholders who want to own our stock next five years or longer, we think this is a smart way to allocate capital. And of course, behind all of that is the commitment to remain disciplined as we think about M&A.

And if I just bottom line all that, you've kept the NCIB at 2% of shares outstanding. Is that a level that you're happy with? Or the -- what's the old joke, I've never met a CEO who is happy with where the stock is trading. Is 2% of shares the right level? Or do you anticipate getting more aggressive on repurchases going forward?

Well, I'm not going to comment on what we might do in future NCIBs. We launched this one in August. We're, obviously, comfortable with it, and we're executing actively on it.

Thanks for your time.

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

Good morning. Couple, one on the business. The Asia segment you've added that offshore insurance business to it, and that's induced a bit more volatility on the -- in the strain line in particular. Is that a reflection that all of the -- on the market conditions in Asia that are weak or maybe fewer high net worth individuals looking for these type of product?

Gabriel, this is Claude Accum. The International business is a great addition to Asia. We're very happy to have it in our portfolio, as the dynamics in that business is very interesting, with very large cases, very sophisticated clients, sophisticated brokers. The selling process is six months.

You're really not coming through, I don't know if you're on a speaker phone, or...

Can you hear me now, Gabriel?

A little bit better, yes.

Yes. It's -- the international business is a great addition to the Asia portfolio. We are very glad to have joined the portfolio. The dynamics of that business is very large cases, sophisticated clients, sophisticated brokers, and there's only four players in that market primarily, and the selling process is typically six months. So what happens in Q4 is with the uptick in interest rates clients took a bit longer to take a decision to buy. And so we expect some of those sales to defer to 2019. But in the meantime, as sales were down in international in Q4, and that's what you're seeing on that experience gain loss line. It's down a bit. But the dynamics of that business is something we understand well, and we think it will fit well in the portfolio going forward.

So nothing unusual?

No, as it's like.

All right. Thanks, Claude. I've got a couple to throw out for you here. Is there an update on national pharmacare, potentially rolling out on the future? I know the government is looking a little bit uncertain these days, but that could have a risk -- put a risk in your group business. And then the leg -- we haven't talked about legacy business for Sun Life in quite some time. I know you've got a runoff UL -- FGUL business. Is there any movement on that front? Are you exploring any opportunities there? Is that the market warming up at all for potential disposition?

Thanks for the question. I'll start by asking you, can you hear me well as I'm sitting right next Sean [ph], perhaps you can hear him.

No, I can't. I don't think I'm the only one, I think you're maybe too far from the speaker.

I'm actually quite close to it, but it is not working well. Is it better now, Gabriel?

A little bit. I'll strain my ears.

Okay, thanks. I'll take the pharmacare question, the first one of the three of them there. We don't know where the government is going, and there's different signals coming in different points in time. The comment I would give you is that generally the system works well for most Canadian. Clearly though, it could improve. Our view, Gabriel, is that the best way to improvement it is to strengthen the partnership for the cooperation between public and private. That should happen in three areas, frankly first is pricing. We think that Canadians should be able to see the lowest price possible to there medicines. The second area is catastrophic coverage. We think that public and private could come together on things like high cost treatment. And the third one is, I would describe as a standard formulary. And so, in other words, if you already have coverage through your employer, which millions and millions of Canadians have, you can continue, you can continue on that. And if you are one the few unfortunately either no coverage or insufficient coverage, you could be on the public system. We don't know, as I said, where things are going. As a company, we're actively engaged both in a direct manner and through the industry association, the CLHIA. So yes, there's a budget coming up from Minister Morneau. We might get some more signals there, but that's how I would describe the situation in pharmacare in Canada.

How big is the drug part of your group business in Canada?

It's an important, but it's not -- I mean, if there was a change to pharmacare, it would depend of course what features -- does it go all the way to single payer? Or is there some in between? I think it's a bit too early to speculate at this stage in terms of where it can go, but we have a very good and thriving GB business overall.

Okay, thank you.

And Gabriel, it's Dean. Just on your question on the legacy businesses and you referenced the -- I think the U.S. UL book, but in addition to that, of course, we've got our U.K. closed block book and together they make up around 10% of the underlying earnings of the company. On the one hand, as you would quickly note these businesses are not front and center in our four pillar strategy. Our approach to this has been to optimize them, so optimize them around the client service, around tax, capital, the reserves, the use of reinsurance, expenses and so on. And I think we've been making good progress on all those fronts across those blocks. We think those businesses give us optionality for the future. So today, they generate good cash flow. Generally and earnings. And at some point in the future, there's some optionality there for us. In the meantime, as I said, job one is to run them as well as we can and keep improving the operation of them.

Thanks. I heard you well, Dean.

Thanks, Gabriel.

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

Yeah, thanks very much. Just a couple of questions. One with respect to MFS margins. They were -- in what have been a bit more of a difficult market, they were pretty good at 38% in the fourth quarter and they were 38% for all of 2018 and 38% for all of 2017. How should we be looking at the margin going forward? I know this is a function of equity markets, but if we had equity markets probably go up in the area of 6-ish to 8% annually. How should we be thinking about margins at MFS?

Good morning, Tom. Mike Roberge. Maybe I'll start with how we've been able to maintain margin. Markets have helped over the last couple of years. We've been able to reinvest in the parts of the business growing our fixed income, growing on our non-U.S. retail business. At the same time, we've been really careful around discretionary expenditures across the organization. And so, we've been pretty vigilant to not grow headcount substantially, invest in the business and been able to maintain margins. I think as you think about on a go-forward basis in a normal environment, as we've said over time, we think that margins in the mid to upper 30s are something that we can maintain over that period of time, and I think we continue to say that that's the case.

Okay, thanks. And then a follow-up question with respect to Asia. I mean, we see that underlying earnings were up nicely year-over-year from CAD111 million to CAD140 million in the quarter. But if I look at Page 25 of the supplement, the under -- the expected profit went up from CAD111 million to CAD117 million. So not much there the earnings on the surplus year-over-year were up 10 million, but the impact of new business was down $15 million. So if we just look at the sum of those three numbers, Asia was flat year-over-year. So how are we to determine -- how should we be looking at Asia growing if those are the -- what we believe to be the three biggest numbers that should drive underlying earnings growth in Asia?

Tom, it's Claude Accum here. Thank you for that question. So if look at Q4 of last year to Q4 of this year, you're right to call out the strong growth, up $29 [ph] million. Expected profit was up, but it was only up 5%, and the other pieces that came up nicely were AFS surplus that was quite strong at $10 million and coming back to expect profit, it is difficult to look at a single quarter Q4 of last year versus Q4 of this year. This is going to -- been just to focus on FX changes that happened. And it's only been focus -- we give high priority or high weights through that market changes. Markets were down in Q4 of last year and Q4 of this year and that flows through in exact manner [ph]. As I said before, a better way to look at it, Tom, is four quarters of expected profit this year versus four quarters of expected profit last year, and on that basis some of those other quarter-to-quarter changes even out and we'll see that 20% growth in expected profit 12 months over 12 months.

And Tom, it's Kevin Strain, the expectation of Asia providing 15% to 20% in terms of our medium-term objective of 8% to 10%, it's still what we are looking at for Asia.

All right. I mean just in order to kind of help us model that I think, if you would -- if you're able to somehow -- be able to transcribe the SOE in terms of those three key drivers maybe stripping out AFS gains or something like that out of the earnings on the surplus so that we can determine how to model the underlying earnings. I think that will help us going forward.

Yes, it's Kevin again. Claude mentioned that the fee income had an impact this quarter, right. So you don't see that same impact for the full year, but it does have an impact on the current quarter. So it's a little bit tied to the equity markets, because there's a lot of unique products.

Okay, thanks.

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

Hi, good morning, Kevin. I think in the past you've mentioned expense gaps and I know you don't have an official expense target at Sun Life and whatnot, but I'm hoping maybe if you're willing to get into talking about the expense gaps maybe by region, and I know this quarter I think it's on a year-over-year basis you showed some expense improvements in Canada. What are you doing from a process perspective to drive down some of those expense gaps?

You can see, there's two things we're doing on the expense gap. One is obviously managing our expenses very closely and you can see that in the Canadian results in the corporate expense line, in the U.S. expense line, in the MFS expenses we talked about earlier, and also in Asia. When you think about Asia, we are growing rapidly and we talked about that growth so will you see expenses grow a little bit more quickly in Asia than the rest of the company, but you are seeing the good level of expense growth I talked about in my opening remarks around operating expenses before the fair value adjustments and the some of the restructuring costs being flat year-over-year. So I think we're doing two things. We're growing our business that comes through in the VNB numbers and in the sales numbers, the growing allowable and we're trying to be very focused on holding our expenses across the businesses, and we also reflect the current market conditions. So as we see the market conditions becoming more challenging, we focus on expenses and holding the expenses in. So I'd say it's looking both at growth because we don't want to stop the growth and the growth providing allowables can provide really good reductions in expense gaps over that over the medium term, but we're watching that expenses very closely and that comes through in the expense numbers.

Any thought of giving more detail on those or maybe that's something you're thinking about for the Investor Day. I'm just curios?

Yes, we can think about that for the expense for the Investor Day, Doug, and look at ways that we can help you to think about expenses versus allowable growth and how we kind of see it by business group.

And just -- I just -- I know one metric isn't always the best way to judge things -- I just, in terms of trying to kind of keep track of how you are progressing on expenses, I guess, it's not as crystal clear. And then Dan, just going back to the stop-loss, you've done a lot of pricing adjustments on that business going back a few years. Am I correct in one of your other comments that year results in stop-loss is better than your pricing or you're getting pricing gains or whatnot. Are you in a position where you think you're going to reflect that in terms of drop pricing or I just thinking of that in any competitive environment and any thoughts around medical cost inflation, because I think that's what got you into trouble previously? Thanks.

Thanks for the question. I wouldn't really say that medical cost inflation was the driver in the past, although there is a fair amount of cyclicality in this business and they are tend to be times when there are competitors pricing very aggressively and that's probably a bigger driver on. So we did see, as you know, two and three years ago, somewhat decreased margins in our stop-loss business, although still quite good margins and probably the best in the industry at that time. We adjusted to that cycle faster than any of the competitors and that's really enabled us to drive very good results now. But we're also seeing the market, what we're calling a flight to quality, a lot of the brokers to manage this business have been moving business to us and in some cases back to, because they're tired of chasing a low rate and then having to move the business a year or two later. We've also built out our sales force and that sales force is working very effectively with a variety of channel partners. So the end result is that we're getting our target pricing in some cases, actually a little better than our target pricing. So we've been fortunate in that our results right now or even better than what we target, but we're not planning on using any of that for lower prices and grab more market share using price, we're getting plenty of market share just through the value that we're bringing to the marketplace.

Perfect, thanks for the color.

And our next question comes from Paul Holden of CIBC. Your line is open.

Thank you. Actually, I want to ask a follow-up to the comments you just made on pricing cyclicality. Where would you say we are in the pricing cycle now and has competitive dynamics around that pricing cycle maybe change because of that broker behavior you highlighted?

In the -- Paul, are you referring specifically to stop-loss?

Stop-loss, that's right, yes.

Yes. Okay. I think we are seeing more rational pricing now than we saw two and three years ago. I think we're always vigilant for any change in that environment because the market has stabilized and margins are healthy, probably for more than just us, so there are always going to be some change there, but we are not -- right now we continue to see a rational pricing environment in stop-loss. And as I said, we're also finding that other value is becoming important expertise, stability of rates, our ability also to help managed costs, we are increasingly getting involved on the clinical side, helping to manage the exposure as opposed to just reimbursed exposure and some of our partnership, for example with captive partners like Pareto Health, and with TBA, like Collective Health is bringing additional differentiated value to the market. So it's a combination of a rational, pricing environment that has not started to fire at this point and are bringing some true differentiation for the market.

Okay. And then maybe sort of similar question in terms of U.S. employee benefit plans where we're at in terms of the pricing cycle there in your opinion?

Yes, I mean, the part of the answer there, of course, is our own work that we've been doing to reprice that business and as you know, that is a business, unlike stop-loss that typically written on a three-year cycle or a three-year rate. So it's a longer period of time to go through that and we continue to go through that and make good progress on our book. In terms of the external environment, we would describe the marketplace as continuing to be rational. We're not seeing predatory or aggressive pricing, but it seems like a relatively rational, pricing environment across the board there.

Okay. Good. And then final question is going back to the discussion around Canada individual insurance sales. So, you commented that the power product with stable and doing fine, but then that suggest maybe you've given up some market share and another product, given that your two major competitors saw pretty significant year-over-year growth in sales and Sun Life was down. So maybe you can comment there.

Paul, I'm going to start again by asking if you can hear me?

If you could speak a little bit louder that'd be helpful.

More than that, I'll move around the room. How about that now?

A little bit better.

Okay. So yeah, individual sales, there's a few drivers there that I can talk to. The first one, Paul is, we did have some changes in the product level in Q3 of '17 taking effect at 1/1/18. And one of the things that did is drive up some volume in Q4 '17. And so that's one of the factors driving the impact. The other one I would say is the continued focus, as you know, we've had on upgrading quality in the CSF channel and the impact that has on the number of advisers. And the third one, I'll come back to is the third-party channel. It's a high net worth -- an ultrahigh net worth channel. Sales can be quite large and it can be lumpy. And if you miss on a few, it can have an impact. So that's really the drivers, I would say, of the -- what you're looking at on Q4 last year to Q4 this year. Generally, if you go back, say, six or seven quarters, you will find that we are either number one or number two in sales, both across the life and health. Feedback we get from both our own channel and the third-party channel is that our products are attractive and competitive. So taking all that into account and if you add in there the fact that, generally, Canadians remain underinsured. We actually think that that creates good growth opportunity for us over the medium-term.

Okay. So if I got the message correct, you're happy with where your competitive position sits and no changes planned.

No.

Okay, good. That's all I had. Thank you.

Your next question comes from Mario Mendonca of TD Securities. Your line is open.

Good morning. Just a quick question going back to MFS for a moment. I tried to make the adjustments to the expenses looking at the fair value and it's still does look like expenses were down substantially. And I tried to do the math, and I think I got it right. It's about $47 million reduction in expenses adjusting for the fair value. Could you help us think through where that $47 million comes from, like how much of that would be variable -- reduction in variable costs versus actions you've taken to reduce expenses?

Mario, are you asking year-over-year or quarter-on-quarter?

Year-over-year.

Yeah. If you look at again year-over-year, a little over half of that number is going to be the fair value adjustment. The next largest item is going to be compensation. So it's going be variable compensation that flexes with the profitability in addition to some other things that we do around compensation where we can adjust compensation and that's headcount and that's the level that we pay out of overall compensation. And then the last piece of it was lower dealer trails on share class sales to advisers. So that number breaks down about $57 million was fair value $29 million of it was compensation, $17 million of it was dealer trails.

Okay. So essentially, ex the fair value adjustment, it looks like pretty much all of the decline was variable in nature, not sort of fixed cost that you pulled out -- somehow pulled out of the system.

Yeah, most of it was variable, with some things that we can do on the margin on the labor side -- on the labor cost side, but most of it is variable.

Okay. So maybe you could move on then to -- this might be for Kevin or one of the Kevin's, and it relates to mortality and morbidity in the U.S. And I don't want to make too much of fuzz about one quarter, one quarter really doesn't mean much, but how are you looking at the deterioration mortality and morbidity in the quarter? It was surprising. It's not something we see often. Is there any particular block of business cohort that you're seeing that troubles you?

Hi, Mario, this is Kevin Morrissey, I'll take that one and I'll let Kevin comment if he wants to add to that. So when we look at the quarter in particular on the mortality side, we saw most of the negative experience there in the U.S. in-force management block of business. That was related to some just a few fairly large claims that were reinsured, and I would say that, that was something that was not something unusual in terms of a normal volatility of the mortality experience. When I look at kind of the year-to-date earnings for mortality across the business, I'm not seeing anything there that jumps out as a concern that was a small negative for the year. On the morbidity side, when we look at the quarter, most of that was related to the U.S. group business. And in particular, it was the LTD termination rates were unfavorable. So that was something that Dan talked about in terms of profitability and the work that continues in terms of three-year cycle of repricing. And I think that's something that can shows up in the full year as well. That is something that we are looking to address going forward.

Just so we're clear, in terms of any reserve adjustments, there wouldn't be anything -- any major reserves tied to morbidity, if I've got that right, morbidity on the group side there. You don't book a lot of reserves against that. Is that a fair statement?

Yeah, that's right, Mario.

And then on the mortality, there's nothing that would make you want to make an adjustment there?

No, there's nothing that looks of a concern there. And as you probably notice in our assumption message changes this year, mortality continues to be quite favorable and overall has been positive for the company.

Yeah, it's Kevin Strain, Mario. I just might say that the mortality in general we've seen really strong results and we have expectations, but that's an area we know how to manage well and we like that risk category. The specifics just to be clear on the U.S. side, there is a small number of large cases that they don't have reinsurance related to them. And those -- there's some volatility around that, but it's a small number of cases and we saw some of that volatility in this quarter.

Got it. Thank you.

Your next question comes from Scott Chan of Canaccord Genuity. Your line is open.

Thanks. Good morning. Just a quick follow-up on the stop-loss business, is there a seasonality in terms of sales within that product? Because I just noticed in Q4 is materially different than other quarters.

Yeah, there certainly is. This is Dan. So in the fourth quarter, we book our sales that are effective dated 1/1, because we book the sales when they're made. So for stop-loss that's by far the biggest quarter of the year typically.

Okay, that's helpful. And just turning back to MFS. Mike, I'm looking at the net flows, I think it was kind of decent quarter-over-quarter considering the macro backdrop. Your relative underperformance improves, and it's great, and there's a lot of industry headwinds. If you can kind of point to a couple of factors to us watch to potentially see if that kind of trend on the net flows could improve, whether it's like a product category or whatnot?

Hey, good morning, Scott. Thanks for the question. Yeah, I think the number of things that we're working on that we're looking to execute again, against first in U.S. retail is broadening out our exposure at all the big dealers in the U.S. Last year, irrespective of how tough the environment was, we actually grew sales with eight of our top 10 dealers last year, what was a pretty tough environment for active. And so, broadening our opportunity on the U.S. side, on the non-U.S. side, we think there is an opportunity to as platforms open up and distribution opportunities open up outside of the U.S. to improve flows on the non-U.S. side and we've talked a lot in the institutional side. The big opportunity for us is fixed income is our ability to position ourselves as a big fixed income player institutionally. We are known outside of the U.S. primarily as an equity manager, we need to make that change and sell product solutions and fixed income to existing and new clients around the world. And so, we're working all three of those things. We're making progress against them, and we're hopeful that we'll begin to see a continued improvement in all of those.

Thank you. That's helpful.

That was our final question. I will now return the call to our presenters for closing comments.

Thanks, Chris. I'd like to thank all of our participants today, and if there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you, and have a great day.

This concludes today's conference call. You may now disconnect.