Dean Connor - President, Chief Executive Officer Kevin Strain - Executive Vice President, Chief Financial Officer Michael Roberge - Chairman, MFS Mclean Budden Limited and Co-Chief Executive Officer, MFS Investment Management Kevin Morrissey - Chief Actuary and Senior Vice President Greg Dilworth - Vice President of Investor Relations Jacques Goulet - President, Sun Life Financial Canada Randy Brown - Chief Investment Offer Claude Accum - President, Sun Life Financial Asia.

Steve Theriault - Eight Capital Humphrey Lee - Dowling & Partners Tom MacKinnon - BMO Capital Markets Meny Grauman - Cormark Securities Doug Young - Desjardins Capital Markets Gabriel Dechaine - National Bank Financial Sumit Malhotra - Scotia Capital Paul Holden - CIBC World Markets Mario Mendonca - TD Securities.

Good afternoon. 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, Q1 2018 Financial Results Conference Call [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 first 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 first 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 two, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures which is one part of this afternoons 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 afternoon everyone. Turning to slide four, the company reported underlying earnings of $770 million and underlying return on equity of 15.1% for the quarter. Sun Life U.S., Asia, and MFS each delivered strong earnings growth over last year and Canada had a solid quarter.

Yesterday we announced the dividend increase of 4%, reflecting our continued earnings momentum. As you know, this quarter we began reporting under a new capital regime, the Life Insurance Capital Adequacy Test or LICAT framework.

What was a strong capital position under MCCSR is even stronger under LICAT, as evidenced by the pro-forma $1.2 billion increase in hold co. cash at SLF to $2.9 billion that will occur post quarter as we transfer up cash from SLA to SLF.

This capital position, combined with the financial leverage ratio of 22% provide both a strong defense, as well a strong offence in terms of the ability to take advantage of opportunities. Looking at sales, the Value of New Business or VNB was up 33% over the prior year from a combination of higher sales volumes and favorable mix of business.

Asia individual insurance sales grew 18%, Asia wealth sales grew 32% and U.S. Group Benefit sales grew 17%, all on a constant currency basis. In Canada our retail insurance sales grew down relative to strong sales in the first quarter of 2017, including the lead up to tax changes. Asset Management sales grew 11% in constant currency.

The results of a strong quarter in growth and expected profits, up 13% over the prior year, 17% on a constant currency basis with growth across all four pillars, with particularly strong growth in Asia and asset management. In Canada we had a successful RRSP season.

Retail sales of SLGI mutual funds were up 28% and SLGI’s assets under management increased by 24% year-over-year and the quarter at almost $22 billion. In our client solutions business, we grew in planed deposits by 45% over the prior year to $225 million for the quarter.

This growth was driven by more targeted touch points with our clients from the increased profile and use of Ella, our Digital Benefits Assistant. In U.S. Group Benefits we grew the after tax profit margin from 5% at the end of 2017 to 5.6% on a trailing 12 month basis.

Our success here reflects strong execution on the AEB integration, disciplined expense management and good progress on pricing and renewals. Asia results were strong, with underlying net income higher by 32%, reflecting growth in imports business, sales growth and improved product mix.

In the first quarter Asia delivered 17% of our global underlying net income and we expect this percentage will continue to grow. Asia results reflected for the first time our International High Network Life Insurance business, which was previously part of Sun Life U.S.

Most of the clients, nearly 90% of these high network clients we service in International Life Insurance are in Asia and we believe this change will help accelerate the development of high network business across our countries.

In asset management we delivered strong investment performance across the global platform and ended the quarter with $682 billion in assets under management. Sun Life Investment Management, our alternatives business generated net flows of $335 million. At MFS net outflows of U.S. $4.3 billion improved over the prior year.

MFSs investment performance remains strong with 83%, 84% and 91% of MFSs retail mutual fund assets at the top half of their Lipper categories over three, five and 10 year periods respectively and this year’s Barron’s ranking of U.S.

Mutual Fund families, MFS are in the number two spot for 10 year performance, a testament to their focus on delivering value for clients over longer horizons. You know remarkably, in nine of the last 10 years MFS has ranked in the top 10 of that Barron’s list based on 10 year returns.

The intensity of our efforts and pace of chance around the clients continued in the quarter. In Canada we continue to improve and extend our mobile app, which is the number one client rated financial services app in Canada and focused on helping Canadians live healthier lives.

So this quarter we launched Virtual Doctor on Demand, where clients can access immediate care and peace of mind through a visit with a physician by live video, telephone or text. In the U.S.

we continue to enhance the onboarding experience for clients by streamlining and automating our processes, taking administrative work off the shoulders of benefits administrators and improving our client education and touch points. Our surveys show increased levels of client satisfaction with their Sun Life Implementation experience.

In this quarter we installed more than 1,200 employer groups. Our group business in force grew to U.S. $3.9 billion of premium and other revenue. In Asia our Hong Kong launched our client mobile app providing additional convenience and more personalized contact.

The app leverages many of the same features we offer to our Canadian mobile users including fingerprint ID login, policy and overage summaries, account value updates and access to support through a Sun Life Advisor or call center.

Our Hong Kong Mandatory provident fund business was recognized as the MPF Plan of the Year, in recognition of outstanding service in Sun’s performance. Our MPF funds won another nine awards, including consistent performer in the one, five and 10 year categories.

We have the fifth largest MPF business in Hong Kong and has been the fastest growing in the MPF market over the past 10 years. So overall, we are off to a strong start in 2018. The move to LICAT shows the strength of our capital and risk story and gives us more financial flexibility.

We have a lot of momentum, we are enhancing the client experience and we are executing on growth across the company. Putting it all together we are exciting about 2018 and we are making real progress towards our ambition to become one of the best insurance and asset management companies in the world.

And with that, I’ll now turn the call over to Kevin Strain who will take us through the financials. .

Thank you Dean, and good afternoon to everybody on the call today. Turning to slide six, we take a look at the financial results from the first quarter of 2018. We saw strong results and profitability, growth and financial strength year-over-year. Underlying net income was $770 million, up from $573 million in the same quarter last year.

We saw strong growth in underlying net income across all four pillars. Underlying results in the quarter reflected a 13% growth in expected profit, the contribution from interest on par seed capital and a lower tax rate due to U.S. tax reform.

These results were achieved against the headwind of a strengthening Canadian dollar, which reduced underlying net income by $19 million relative to the same period a year ago. Interest on par seed capital reflected in SLF Canada and SLF U.S. results contribute $110 million to earnings this quarter.

At the time of seed utilization shareholders of Sun Life and Clarica transferred seed capital to support new business in the participating policy holder accounts and the seed capital with interest will be returned the shareholders when the capital in the par account was sufficiently large enough to support the business.

Our success in growing the par business has allowed us to transfer the seed capital back to shareholders this quarter and to recognize the investment income. We found the benefits from U.S. tax reforms this quarter as expected in MFS and in the U.S.

Our reported net income for the quarter was $669 million up from $551 million in the first quarter of 2017, including unfavorable market related impact of $79 million. Our leverage ratio of 22.2% remains below our long term target of 25%.

We redeemed $400 million of subordinated debt in the quarter and repurchased and canceled 3.1 million common shares. Our capital position continues to be in the area of strength under LICAT with strong solvency ratios for both Sun Lift Financial and Sun Life Assurance.

Turning to slide seven, we provided details of underlying net income by business group for the quarter. We saw year-over-year underlying earnings growth across each of our four pillars. In SLF Canada underlying net income of $295 million was up 29% on growth in fee income on our wealth businesses and the benefit of the interest on par seed capital.

The underlying return on equity for Canada was a strong 17.9%, expected profit, the impact of new business and the surplus income all grew in the quarter with a combined growth of almost 10%. In SLF U.S.

underlying net income more than doubled from the first quarter of 2017 on favorable morbidity experience from the stop-loss business, gain from investing activities on insurance contract liabilities, the contribution from interest on par seed capital and U.S. tax reform.

Our group benefits after tax profit margins increased to 5.6% in the first quarter from 2.8% in the prior year. SLF asset management had underlying earnings growth of 26% on higher average net assets of both MFS and Sun Life Investment Management, and a lower tax rate due to U.S. tax reform.

MFSs pre-tax net operating profit margin improved to 38% from 36% in the prior year. In Asia, underlying net income grew by 32% over last year and our underlying return on equity was 10.7%.

The improvement in SLF Asia’s ROE this quarter reflects strong growth in net income, the addition of the high network international business, as well as the change in our capital allocation models that saw us move our Asian business to a fully levered basis, consistent with our other business groups across Sun Life.

Turning to slide eight, we provide details on our sources of earnings presentation. Expected profit of $734 million increased by $83 million or 11% from the same period last year. With growth across all four pillars, expected profit was particularly strong in Asia and asset management growing 23% and 11% respectively.

Excluding the impact of currency, results of SLF Asset Management expected profit grew by 17%. We had new business during this quarter of $7 million, an improvement of $11 million over the same period last year from higher levels of new business gains in SLF Canada and SLF U.S.

We reflected a methodology change in our source of earnings to better reflect the expected profit in new business strain in our U.S. stop loss business. This does now impact our overall earnings, but lowers the level of new business strain in SLF U.S. but is offset by an equal decrease in expected profit.

As a result of this methodology change, we are revising our quarterly estimate for new business strain from minus $10 million to $20 million per quarter to a range of plus or minus $5 million. I’ll remind you that this is a quarterly average which can fluctuate based on business mix, sales volumes, currency and changes in the level of interest rates.

Experienced items were largely offset this quarter as unfavorable net market related impacts, lapse and policyholder behavior and mortality were offset by the interest on par seed capital, investment activity, favorable credit and morbidity experience.

Others, which have managed to negative $50 million in our sources of earnings disclosure includes the fare value adjustment on MFS share base award, acquisition and integration costs and the impact of hedges in SLF Canada that do now qualify for hedge accounting.

Earnings on the surplus of $157 million was $25 billion higher than the first quarter last year, reflecting higher levels of investment income and realized gains. Our effective tax rate on reported net income for the quarter was 16.4% and on an underlying basis the tax rate for the quarter was 15.8% and in line with our stated range of 15% to 20%.

Turning to slide nine, let’s look at the new LICAT capital framework and what it means for Sun Life. We ended the first quarter with a LICAT ratio for the holding company SLF of 149%. This combined with a leverage ratio of 22.2% places us in a very strong capital position at the holdco level. Our LICAT ratio for SLA was also a strong 139%.

The higher ratio at SLF largely reflects the excess cash of $1.7 billion held by SLF Inc. Under the LICAT framework, the amount of capital required above the supervisory target in our operating company is lower and we will be transferring $1.2 billion from SLA to SLF in the second quarter.

When added to the $1.7 billion of cash we already have at SLF, this will result in a pro-forma excess cash level at SLF of $2.9 billion. While this will have no impact on the LICAT ratio at SLF, the transfer will reduce the LICAT ratio of SLA by approximately seven points to 132% or 132.5% on a pro-forma basis.

On slide 10, we illustrate the amount of capital above the supervisory target under both capital frameworks for SLA. Under LICAT we have $7.1 billion above supervisory target of 100%. This compares to 5.2 billion above the supervisory target at 150% under MCCSR for an increase of almost $2 billion.

This reflects a number of factors, including the efforts we have undertaken over the past several years to reposition the company and improve our risk profile. On slide 11, we show our market sensitivity to interest rates and equity markets under LICAT.

The sensitivity to changes in equity markets, with a 10% change in either direction, impacts our LICAT ratio by approximately half a point. This impact of interest rate movements is counter to our earnings sensitivity, where interest rate increases are a positive and interest rate declines are a negative.

As interest rates declined 50 basis points, our LICAT ratio increases at three points. Almost all of this sensitivity is due to the sensitivity of changes in interest rates and available capital in surplus allowance.

This difference relates to the inclusion of unrealized gains and losses on AFF bonds and OCI and the change in insurance feedbacks from interest rate changes. Slide 12 shows sales results cross our insurance and wealth businesses.

While the total insurance sales were down 14% or 12% on a constant currently basis, we grew our VNB by 33% over the prior year reflecting a positive mix of sales. This quarter we began reporting VNB excluding our asset management pillar.

We believe that VNB is a strong measure of future profitability and growth in the insurance business, but the other measures like AUM growth, fund performance and net deposits are better measures for the asset management business.

SLF Canada sales were down 34% at the first quarter in 2017 and particularly strong sales driven by tax and product changes were introduced in January 1, 2017. Notably at $88 million we continue to lead the Canadian industry for individual insurance sales. Sales in SLF at the U.S.

grew by 17% from strong sales in group life and disability and in stop loss. Asia individual insurance sales were also quite strong, growing 18% over the prior year on double digit growth in China, the Philippians, Vietnam, Indonesia, Malaysia and in India.

Total wealth sales of $39.8 billion were up 6% over the prior year and 10% on a constant currency basis. Asia wealth sales were up 32% compared to the same quarter in the prior year and 10% of a constant currency basis.

Asia wealth sales were up 32% compared to the same quarter in the prior year supported by strong sales in our MPF business in Hong Kong and higher fund sales in India and the Philippines. Sun Life’s asset management sales were up 6% as sales at MFS remained strong, including U.S. retail mutual fund sales that reached an all time high.

Wealth sales in SLF Canada were down 13% as there were fewer large case sales in Group retirement services than in the prior year. Individual wealth sales in Canada were up 5% on continued growth from our wealth manufacture products, including Sun Life Global Investment mutual funds. So to conclude, we had a good first quarter.

We saw strong growth in earnings, ROE and value of new business. Taken together with an even stronger capital position under LICAT, we’re well positioned for the remainder of 2018. With that I’ll turn the call over to Greg to begin the Q&A portion of the call..

Thanks Kevin. To help ensure that all of our participants have an opportunity to ask questions on today’s call, I would ask that each of you please limit yourselves to one or two questions and then to re-queue with any additional questions. With that, I’ll now ask Carol to please poll the participants for questions..

[Operator Instructions] Our first question comes from Steve Theriault from Eight Capital. Please go ahead. Your line is open..

Thanks very much.

A couple of questions, but first Kevin if I could just ask the up streaming you did, the 1.2 that your planning on doing I guess or maybe it’s already occurred in Q2, but the 1.2, the 1.9 billion bump you get on application of LICAT, should we expect you to take the additional $700 million up at some point or is that under discussion or is this the move that we should expect in its totality?.

You know, this is the first quarter for reporting LICAT and its still fairly new days into the LICAT regime and so optimizing the capital under LICAT will be done on a measured basis going forward..

Okay, so possible more to come. On the U.S. business for Dean, I wanted to circle back on the margin. You’ve talked about a target margin of 5% to 6% in group benefits. The last quarter you talked about a 75 basis point tailwind from a lower tax rate. So you know we see the margin this quarter up nicely at 5.6.

Is that in the middle of a 5% to 6% range or at the low end of a more like a 5.75 to 6.75 range including the lower tax rate? Just want to make sure I understand sort of where we are in that process?.

Yeah, I think obviously it’s in the middle of a 5% to 6% range at this point, but you’re right that we said we should get a tailwind from the lower tax rate.

That will phase in gradually as this is the trailing 12 months measure, so we only saw a portion of that in the first quarter, so that’s going to be an additional tailwind through the rest of the year. But certainly we’re you know nicely in the middle of that 5% to 6% range at this point and hoping to see that go higher..

Okay, and then last thing for me, the U.S. employee benefits business, the in-force has been consistently down, but then I saw that sales were up year-over-year for the first time in quite a while. You know we can definitely see the turn in the stop loss business and improve margin overall.

Can you refresh us on your outlook for the employee benefits business looking out the rest of the year?.

Sure. The reduction in BF for the same quarter last year is primarily related to two items. One was, we had one large license disability client that lapped on January 1 and then we also last year converted the legacy Sun Life dental business to the stronger legacy assurance products. That was a walker business that needed quite a bit of rate action.

Actually in both of those cases the lapsation of that business was a positive for our margins, because it was under performing. But those are the primary drivers of the bip decline in employee benefits. As you noted, we’re seeing very nice growth on stop-loss. We’ve had a 20% year-over-year growth in the stop-loss bip.

Also as you noted, sales are up year-over-year in the first quarter, so we think we’ve got good momentum and with the lack of those one-time type items that occurred last year, we think we’re on a good growth path. We should start to see growth in bip, in employee benefits and a continuation in growth in stop-loss..

Thanks for that..

Our next question comes from Humphrey Lee from Dowling & Partners. Please go ahead. Your line is open..

Good afternoon and thank you for taking my question.

Just related to the $2.9 billion cash at the holding company, my guess is what are you going to do with that? That’s a really sizable war chest and I wonder how you will get it?.

Humphrey, its Dean Connor here. Thank you for your question, and you’re right, it is a very strong capital position. It’s not just the cash at the hold co, it’s a 22% leverage ratio which as Kevin noted is below our long term target of 25% and a strong LICAT of 132 at SLA after we make that transfer. So it is a nice position to be in.

We continue to focus on organic growth. We continue to focus on M&A activities and as I said before, and I won’t apologize for being consistent or boring on this, but as I’ve said before, you know we do take a disciplined approach.

We are looking for opportunities that are on strategy where that will support our foretellers and we’re looking for opportunities where the economics makes sense and there are hurdle rates.

So we’re clearly in the middle of lots of conversations across all four pillars on that front and of course buybacks have been part of the mix over the prior years and we’re in the middle of an NCIB where as Kevin noted we were active in the quarter and that will continue.

I would note that we feel it’s a very good time in the cycle to have a strong balance sheet.

You know the stock market has been on a run for nine years, plus the credit cycle is in its later innings, so while we are looking for opportunities and we are looking to put that capital to work, we’re also mindful that we’re in the later stages of this cycle and I think it’s a really good time in the cycle to have a strong balance sheet..

And then just to follow on the kind of data strategy surrounding the four pillars. So we talked about kind of the – all the different pieces. I guess in the U.S. you always talked about being in the group business. But what was your appetite for group retirement given your expertise in Canada and your expertise in Asia.

Is that something that you contemplate given your asset management business and Sun Life could be a strategic benefits?.

You know we’ve looked at the U.S. Group retirement business many years in the past. In fact at one point has a small 401k business originally part of MFS and part of Sun Life and then we sold it back in 2010. That market has unfolded as we had expected when we sold the business. It has continued to consolidate.

Margins have continued to come in and we would much rather play in the manufacturing of alpha part of that retirement business through MFS and increasingly through Sun Life investment managements. So that’s the path we’ve chosen.

Your right, we got a very strong GRS business here in Canada where we have the leading position, the number one share in the market that is consolidated in relatively fewer players. We see the U.S. market as a market where there is still more consolidation to come. And so we have been very deliberate as we picked our spots and the U.S.

retirement market is not one of them and instead we’re focused on the group business where we see the opportunity to grow faster..

Got it and if I could sneak in one more. MFS you definitely have very strong growth sales in both mutual funds and managed funds in the quarter, but obviously redemptions were even higher. So I think you might have some management changes of MFS.

So I was just wondering if you can talk about, like what – which strategies you’re getting inflows versus the strategies your getting outflows..

Yeah, good afternoon. It’s Michael Roberge. You know growth sales as you mentioned you know, we control growth sales and we actually had record growth sales in U.S. retail and our best growth sales here across all channels for the last several years and so growth continues to be strong.

On MFS side, you know there’s really no themes associated with that.

We continue to see some of the same things I’ve talked about from an industry perspective that are impacting, which is moved to passive de-risking, rebalancing by clients and so there is really no theme to the redemption other than the fact that we think the redemption rates are going to have to come down in the industry, because they are at very high levels now and as we’ve seen over the last couple of years.

The way they improve flows ultimately on a big asset basis, that redemption is come down and so you know our thought is we think that we’ll see some normalization. We in the industry over the next couple of years and that obviously improved flows..

Got it. Thank you..

Our next question comes from Tom MacKinnon from BMO Capital Markets. Please go ahead. Your line is open..

Yeah, thanks very much. Good afternoon. My question is just on the notable items that are listed as others. If I take the $110 million seed capital gain out of the assets, a loss of $48 million and from what the footnotes suggest, it’s largely due to short term strategic spending.

This $48 million negative is you know more than twice the negative $23 million in the first quarter last year, so given our driven the negative $9 million from the prior quarter.

So just trying to figure out what’s going on here? Is this all sort of short term strategic spending? Is there seasonality with respect to it? What’s the outlook for that going forward and I have a follow-up. Thanks..

Okay, well Tom I’ll start with an answer and then maybe pass it to Kevin Morrissey.

The other notable line does include our strategic investments that were removed from the expense line and this includes our investment to build out the retail wealth business in Canada and some of the distribution investments in Asia, but that’s only part of what’s in there and there’s some other sort of seasonal or one-time expenses like a charge related to the Affordable Care Act in the U.S.

with benefits volume and some seasonality around some comp expenses. Outside of that there’s just a number of smaller items that worked against us in the quarter and drove that down. But I would turn you there, sort of think about the total notable items. Those are a positive 94 which reflects the 110, right.

So it just gives you a sense of what’s there. I don’t know if Kevin wants to build on that..

Hi Tom, it’s Kevin Morrissey. Just to add to what Kevin said, there isn’t anything else really big that I would highlight there. It really was a bit of an odd quarter and there was just a lot of really small pieces that went against us.

You see these as being kind of unusual in a lot of things that would normally continue and there is really nothing more that’s notable. It was just you know a whole bunch of smaller things added up..

What were those whole bunch of smaller things that added up? What did they amount to and are they – what should be our run rate for this other line I guess..

Yeah, if you look at the run rate in that over the last eight quarters, it’s about minus $15 million and so I think that’s probably – it gives you a good sense you know. We did move some of our strategic spending into that line and I think that’s probably a good benchmark to look at..

So you think that I calculated it to be negative 48.

If you take out the seed capital gain and you think negative 15 run rate is better for that line going forward?.

Yes..

Okay, thanks for that.

And then just a question on the LICAT capital, are you able to share with us what your target LICAT you can price for? I assume your pricing stuff for LICAT now and what do you assume for a LICAT ratio when you do your pricing?.

So let me take a crack at that Tom and I think it’s – we’re not going to disclose our exact sort of pricing ratio at this time, but if you think about LICAT and MCCSR, they are different calculations and LICAT is a more risk based calculation and the mechanics are different.

But if you were just doing a – and I know many of the investors have been looking at the 200% calculation under MCCSR, and if you looked at it on a mathematical calculation that looked at the equivalent excess capital over 100% LICAT number, you get roughly around 120%, but that’s only one way to look at it.

And if you look more specifically at Sun Life and our philosopher capital, so we move the excess capital to SLF, our philosophy of doing that, of moving the excess capital to SLF isn’t going to change our new LICAT, and so that’s why we’re transferring the $1.2 billion excess of capital left.

This brings SLA down to a LICAT ratio of 132.5 and we’ve historically run in excess of our operating target at SLA. So maybe that gives you a – I know it’s not a perfect answer, but it gives you a sense that we’re – how we’re thinking about LICAT, but it is a very different calculation.

So you can’t just take the sort of mathematical excess and say its 120% and look at that, because the risk inside of LICAT and the calculation of the ratio is quite different..

When you get to the 132 LICAT at SLA are you carrying excess capital in your opinion at SLA?.

So you would have seen it just like our philosophy before, we are running at a level that’s higher than our operating target..

Okay, thanks..

Our next question comes from Meny Grauman from Cormark Securities. Please go ahead. Your line is open..

Hi, good afternoon.

Just wondering what proportion of the $110 million in accrued investment income can we expect going forward? How much do we expect on a run rate basis?.

I assume you’re talking of the par seed capital transfer?.

Yes..

Yes, so the transfer amount including capital was around $200 million and that will be inside of the surplus account and we’ll be reviewing investment income on that..

Okay..

And Meny, its Dean Conner, that’s a one-time transaction..

Right. So what I am trying to get is just more sort of on a run rate basis how much that extra capital do you expect to kind of help you with it. Part of the reason that sort of we’re seeing an earnings on surplus look higher over time..

That didn’t come to the surplus this quarter, but in future quarters the investment income on the 200 will come to surplus..

Okay, and I guess it’s a very small number just from that additional capital, from the par transfer?.

Yeah, you know the surplus accounts been earning 3% to 3.5%..

Okay, and just following-up on the capital deployment question, just to ask another way in terms of you know a large amount of dry powder, does it change the way you look at capital deployments specifically.

On the M&A side would it mean that you could look at bigger deals? Do you think of it that way as changing something fundamentally in terms of your plans going forward?.

Meny, its Dean Connor. It doesn’t change our view of the kinds of opportunities that we are considering.

You know when you think about the cash at the holdco, and Kevin answered – he answered to Tom MacKinnon’s question and said yeah, even at 132 we have additional capital at that level and then we’ve got a leverage ratio of 22% and as you know very point of leverage is worth about $300 million.

So you know we’ve got lots of capacity in the balance sheet to make acquisitions so it doesn’t change our view.

We’re more focused on fit alignment and what could we bring to a transaction beyond a checkbook, what could we bring to that business to lift it up and what can they bring to us to lift it up and how do we make the thing worth more than some of the parts, so that hasn’t changed..

Okay, thank you..

Our next question comes from Doug Young from Desjardins Capital Markets. Please go ahead. Your line is open..

Yeah, just a first question on Canada. I mean if I exclude the seed capital gains it looks like underlying earnings declined year-over-year and I think mortality was quite strong last year versus this year and maybe you can elaborate and quantify that.

But it also appears there is unfavorable group morbidity experience, which is very different than what we have seen at some of your competitors this quarter. So hoping to get a little bit more color on that first off..

Thanks for the question. This is Jacques. Obviously I can’t speak to the specific experience of others in the industry. In our case the morbidity experience was slightly unfavorable in the quarter. It was indeed driven by negative experience in visibility which was partially offset by positive experience in extended healthcare.

Overall morbidity experience can bounce around a bit from quarter-to-quarter and at this stage we’re not concerned about it..

Was there anything else, because morbidity was only slightly negative? Is there any other reason why you know the underlying earnings pull back year-over-year.

Was there additional expenses in there, additional noise last year or what I am trying to get at is what should we expect in terms of underlying earnings growth and I think Dean quantified this in the past, but it seems like it’s different this quarter, so..

Sure. Let me give you further views in the – we’ve seen growth and expect a profit across both of the group business, GRS and GB, as well as individual wealth business.

We’ve seen growth in new business gains; our assets under management are up, our business and force is up, so you know those are things that we are pleased about in a way, because they speak to what I would call key drivers of performance.

As Kevin Strain mentioned, in the individual entrance business our sales are actually number one in terms of market share for the fourth consecutive quarter in a row. So I mean overall we think our underlying performance remains pretty solid. We’ve had in Q1 a number of what I would call experienced items like morbidity and policy holder behavior.

None of them were large on a one by one basis. But on a cumulative basis they did create a bit of a headwind. Overall, we feel good about the business and the start of 2018..

Okay. Your second question, you know adverse lapse experience popped up again this quarter. I guess maybe for Kevin, yeah I guess the biggest item here was the U.S. in-force management business. I think that was called out in Q3 of last year, as well as being an issue.

Can you dig into this a little bit more and I guess where I am going with this, you know will this require a reserve posted deal with or do you think this is just normal ebbs and flows. If you can maybe dig into that a little bit, that would be helpful..

Hi Doug, it’s Kevin Morrissey. The largest piece, about half of the total was in the U.S. in-force management implant. This is a lapse supported Universal Life Block of Policies.

The experience in the quarter, we had fewer lapses than expected and the lapses that we did – it was due to less lapse supported policies and by this I mean higher cash values and lower reserves. The second piece constitute about 30% of the total was in Canada. This was an individual segregated fund guarantee.

We view this piece as seasonal, because the valuation at Sun change really are calibrated to some of what we observe as seasonal policy holder behavior assumptions, and particular in regards to customer withdrawal and reset and so we expect this to be a timing issue and we think that we’re going to recover that throughout the rest of the year.

The final piece, it was rather smaller, but I’ll just highlight it for completion. The international rice business, this is now reported in Asia. It was only a loss of $7 million and this is also a Universal Life Block where lapses were a bit higher than expected. So the second part of your question is more looking forward.

You know it’s still early days, it’s only been two quarters since we made the update due to lapse assumptions. We continue to monitor the experience closely and we’ll see it as the future unfolds..

It doesn’t sound like you’re too concerned at this point. At what point in time do you get a little bit more concerned on the lapse side..

I’d say if the trend continues to build. You know if we see the quarters continue to stack up going against us, you know that would indicate that we might see a reserve strengthening coming. But as I said, at this point it’s a little too early to make that call and we’re just monitoring..

Okay, thank you..

Our next question is from Gabriel Dechaine from National Bank Financial. Please go ahead. Your line is open..

Good afternoon. A couple of quick numbers questions here first of all. AFF gains, was that a meaningful number in the earnings on surplus and then you did highlight the expenses that have inflationary item in the corporate segment and tied to IFRS 17.

So are we going to see those costs rolling in over the next few years?.

I’ll start with the discussion on the corporate segment. On the corporate expenses we did see a tick-up in those with regards to LICAT and IFRS 17 and some other tax items in the quarter. You know IFRS 17 is starting to hit, both right now the project and we will see a higher run rate on expenses from IFRS 17..

It’s something you can earn your way through though?.

Yeah, that’s something we can earn our way through. We are simply not changing our medium term objectives..

Okay, good to know..

Gabriel, its Randy Brown. With respect to AFS gains, in surplus, no they were not running high this quarter. That did not contribute to the earnings there..

Alright, then my real question, it’s on the capital front and you know the inverse sensitivity to rates, so higher rates for your LICAT ratio and that is not really – I mean you are far from having a capital concern given your balance sheet positioning, but conceptually, how does that affect the way you manage and plan your capital or your capital management in a rising rate environment? Are you willing to go much thinner on the LICAT ratio knowing that your earning generation is going to be improving over time? Just trying to get my head around that..

It is a bit counter intuitive, because the earnings improve as the interest rates go up and we can understand your questions on this front Gabriel. I think if you – you know one of the ways to think about it, this will likely change under IFRS 17 as well, so some of the sensitivity comes out of IFRS 17.

We are at a very strong capital ratio overall, so I think that gives us a protection around sensitivity of interest rates, but I think in terms of how you manage it, it’s a balance around earnings versus capital..

Gabriel, its Kevin Morrissey here. Maybe I’ll just add to that a bit. At the beginning of the question you’re asking about the sensitivity, so I just want to elaborate a bit more about those components, because they really are driven by the new components in LICAT, it’s either this under MCCSR. Kevin highlighted that at the beginning of his comments.

We see about 55% of that sensitivity is driven by the PfADs, which are essentially mark-to-market and the discounted rate under com reserving, and the other component is the surplus bonds that essentially get mark-to-market through the NCI adjustment you know if they over capital.

So that’s really contributing about 90%, almost all of our sensitivity under LICAT.

As Kevin mentioned, we do have a strong ratio, but when we think about how we’re going to manage this, I see that we’re really at the early days in terms of optimization of capital under LICAT and we have a very strong ratio, but we think we can do more and we’re seeing more activity in the future as we look to rebalance our profile and we think that we can do a bit more around the sensitivity, so more to come on that..

Okay, I appreciate that, that’s helpful.

But just to paraphrase Kevin, balancing earnings versus capital means in theory you will sacrifice capital because of the mechanics in knowing the earnings was going to put you back on site at the time, is that the idea?.

I think we always look at making these calls on an economic basis, right and unfortunately now you get conflicting signals right when you look at it from an earnings perspective or from a capital perspective, but there may be opportunities where those come together.

So an example might be if we have a tactical outlook on rising interest rates, you know we could look to position some of our fixed income security shorter, right. So that would be a short term drop in the run rate of earnings, but it occurs pretty flat and tactically that might be a good call.

So might be an example where those two could come together..

Alright, great. Thank you..

Our next question comes from Sumit Malhotra with Scotia Capital. Please go ahead. Your line is open..

Would Kevin Strain go back to the seed capital transfer? So just so if I heard the previous answer right, so $110 million was the interest after tax benefit in the quarter and what was the total amount of capital? Was that the $200 million that you say got transferred back to the shareholder account?.

Right, and that includes the $110 million. So the total transferred capital and the investment income was around $200 million..

And what was the reason for the timing coming through this quarter? I was speaking with Greg, it didn’t seem like it was related to the LICAT change anyway. Was this – did you have the option of this or was there something that triggered this event being – taking place in this particular quarter..

Hi Sumit, its Kevin Morrissey, I’ll take that one. As you know we set up the seed capital at the time of the demutalization, so this is going back about 18 years. The intention was to always return the seed capital plus the interest, once it was no longer needed to support the new business.

What really triggered the timing was right now we are in a position where the par open accounts and the longer yield to seed capital, we completed an internal review that came to that conclusion at the end of last year.

We had an external actual opinion which collaborated that and we also, the last step which really triggered it was getting regulatory approval and we did get regulatory approval from OSFI for the transferring in Q1..

And this – this next part, it really isn’t – I realize it’s not an overly material factor, but I am always just curious on how companies decide what gets included in their definition of operating or in your case underlying earnings. So why would you do – I mean Dean did say this is pretty much a one-time pick-up.

Why was this included in your definition of underlying earnings since it’s not something that we can expect to occur at this level going forward?.

You know we have a number of places we have seed capital. We have seed capital in Asia, we have seed capital in MFS. In all the cases we have seed capital, we include the investment income as underlying net income and so that’s been our philosophy and if you look at the criteria that determine underlying net income, this fits into that criteria.

So we did make sure that we disclosed it. We were transparent in our disclosure, because it is different and it’s sort of a lump sum one-time item, but we did feel that is was underlying net income. .

That’s one Kevin I just – I feel like we go along with underlying or quarter, whatever the metrics are for the various companies, but I’m always curious as to what your thought process is, so thank you for that. Just move back to Canada for Jacq and Kevin, it might be for you as well.

I think Doug was getting at it, but if you kind of look at a few quarters trend now and then we take out the seed capital benefit, it is now three consecutive quarters of year-over-year decline.

I fully understand that there can be experience back and forth in any particular period, but even when we look at the expected profit now having pretty flat for the last four quarters, I guess Jacq you sounded more positive on the numbers than the trend has exhibited in the last few periods.

What are your views is the key measure that we should be looking at here as to where you see the strength in the Canadian operations?.

As I said earlier, I mean we view the underlying performance as solid and I pointed out the number of things, and there is experienced headwind that has gone against us. I’ve looked at over the next – last few months already and took some deep dive into various businesses and things are looking pretty good.

I mean I don’t want to create expectations, but as Dean has mentioned in his remarks, our investment in digital are paying off very nicely; we are getting a lot of differentiation in the market from some of our tools; we’ve grown our assets under management, we’ve had great results with Ella.

So overall, I don’t feel that there is anything that stands out as being a warning signal of any kind. I think things are looking pretty solid as I said. .

So and maybe Kevin this might be more numerically based for you.

That flatter trend we’ve seen in expected profit over the last four quarters now in Canada and I’m talking sequentially in your – maybe for both of you here that – that is more of an abrasion than anything, stagnant in the business?.

I might start with that an see if Kevin Morrissey wants to jump in. But if you look at Q1 ’17 versus Q1 ’18 and Jacq had mentioned earlier, we saw expected profit growth in individual wealth, group benefits and GRS and so those are three drivers of the expected profit going forward and that’s where we would be looking to continue to drive that. .

Alright, well....

Yes, so the only think I would add to that is we did see a significant increase in individual insurance as a result of the reprising that happens with the tax changes in Canada and we are seeing good year-over-year growth from expected profit in Canada from that. .

Okay, I maybe looking more at the – the year-over-year you are right was fine. I guess I’m just looking at the last few quarter, but we’ll monitor that going forward. Last one quickly for Dean, obviously very strong capital position. You did have a higher level of buybacks in Q1 than we’ve seen previously.

At least a portion of that was related to those third party share agreements that seem to have stopped now for many companies. Does that change your view on allocating capital towards buybacks? I mean obviously there was a – it was more favorable from a pricing perspective via those specific agreements.

Do you still view the ROI of buybacks as attractively post those changes?.

Yes Sumit, thanks for the question. You recall we did under this NCIB 3.5 million shares last year and that was without the benefit of the kind of purchase agreement that you referred to. We had 3.1 million shares in the first quarter, partly with the benefit of that agreement that you referred to. So the agreement was an opportunity.

We took advantage of it while we could and we come back to kind of, it is a normal course, normal course issue bid if I could put it that way and we kind of view it as – we still think at this share price, we still think it makes sense to continue on with the NCIB that we have open. .

Thanks for your time guys. .

Our next question is from Paul Holden from CIBC World Markets. Please go ahead your line is open. .

Thanks good afternoon. So a couple of follow-up questions on Canada. First is, with respect to potential capital deployment, particularly as Dean mentioned the focus will be on the four pillars and of course one of them is Canada. May be to me the M&A opportunities in Canada are a little less obviously than some of the other pillars.

So maybe you can highlight to me what M&A could look like in Canada?.

Well I don’t want to get into that. Really I’d refer back to what Dean said earlier. I mean it has to be something that fits with our strategy, where we think we can bring some value. I think that you are probably right in saying the lists might be shorter in Canada than in other places, but you know at this stage it’s something that we are looking at.

.

Okay, let me ask something a little bit more specific on that point then. We’ve seen a couple of your competitors get active on the NGA side in terms of M&A.

Is there a completive response you are thinking about particularly as your number one in market share for individual insurance sales?.

We like our model. As you know we have our own sales force, we also distribute to third party channels. We see that there is a need and we are investing in that to be in what we call omni-channels. That’s why we invest quite a bit in digital. So overall I would say that we think we are in a good place.

There are some opportunities, but we are – as I said, we are pretty pleased with where we are..

Okay, fair enough. And then last question again specific to Canada, another trend we are seeing across the industry is a focus on cost efficiencies and particularly with respect to headcount.

Is there any kind of commentary confide around there in terms of Sun Life’s strategy?.

Yeah, look specific to Canada, you know there was a springboard last year and we are on track for that. We are looking across the business as I said. You know there are areas of the business that are high growth where we need to continue to invest; I’ll mention again digital, an area that’s very important.

Generally we are in a kind of environment where looking closely at expense is important and we are continuing that as part of the business management. .

Okay. That’s all I had, thank you. .

Our next question comes from Mario Mendonca from TD Securities. Please go ahead. Your line is open. .

Good afternoon. First if we could just think through the growth and expected profit in Asia. The sequential improvement is obviously a lot greater than just the growth in the underlying business and we are using assets as my proxy for the growth in underlying business.

Was there any recalibration of expected profit, as in looking at the pace of which you release those reserves, did anything change in that respect?.

Hi Mario, it’s Claude Accum, thank you for you that question. The primarily drivers of the recent improvements in expected profit as a result of – we had – and its up $24 million in this quarter from prior year is number one as we had strong business growth in our wealth business.

It’s very strong in the Hong Kong MPF channel, very strong in the India AMC, Asset Management Company channel and very strong in the Philippians.

And then the second source was, we had a strong pickup in expected profit in our Philippians insurance business and you wouldn’t have seen that before, but it picked up this quarter due to the strong insurance sales in the Q4 and Q1 in the Philippians. So in a bit more detail our growth wealth sales in Q1 were $3.7 billion.

So that will get you the sense of the assets that are driving it; that’s a 30% growth and that level of sales gives us fees and those fees shows up in expected profit. So you can triangulate to get that. And in the Philippians, Q1 insurance sales they accelerated, they were at 40% and you saw that acceleration in Q4.

In Q4 Philippians sales were up 20% on a constant currency basis and what happens in the Philippians, these products are strongly engineered.

We don’t get a gain of sale or strain when we issue the policy, but in the immediate months thereafter earnings start showing up and so that’s what you are seeing in the Philippians, a lift in expected profit from those strong sales. .

Why wouldn’t this business growth that you are referring to also show up in the form of just stronger asset growth? Why the big disparity between asset growth and expected profit growth, because all the things you highlighted would suggest to me that they would also fall into the assets side. .

It does. If you look at our total assets under management, it’s up materially. .

But far less that the expected profit.

Like sequentially expected profits up 11%, assets are up 3% is there anything that you can think of that would cause that disparity?.

Are you – are you Q4 or Q1?.

Q1..

I think the better place to look is Q1 to Q1. If you look at Q1 this year to Q1 last year, you are comparing two comparable quarters. .

Okay, I’ll have a look at that. The secondarily mortality, it was a weak quarter for mortality, probably it was the first time in some time. Could you just speak to the segments that are played out in the products and if there is anything in particular that would have driven it this quarter. .

Mario, this is Kevin Morrissey, I’ll take that one. We did have a weak quarter in mortality. We had a loss of $21 million pre tax. It’s not unusual for us to see seasonally higher mortality rates in Q1. So we would normally expect to see losses in the insurance business and gains on our payout annuity.

This year we had more losses than gains on the insurance side. We lost $46 million on payout annuity with plus 25. Mortality rates were especially severe in the U.S., where we have life insurance, but we don’t have the payout annuity. So when you look at first quarter last year we had the reverse, we actually had a small net gain as a result of this.

But maybe I’ll turn it over Dean, to comment a bit more on the mortality experience in the U.S. Dean. .

Yeah, thanks Kevin. In the first quarter there was a very severe flu season. The U.S. Centers for Disease Control Act actually tracked this as the worst flu season in at least five years both for deaths and hospitalizations. And while it’s always difficult for us to track this exactly, because cause of death is not always listed as the flu.

It’s usually a secondary cause of death. We think that was the primary driver of the adverse mortality in the U.S. in the first quarter. .

That’s helpful. That’s consistent with what we are hearing from others. I appreciate it. .

And we have no future questions in queue at this time. I’ll turn the call back to Mr. Dilworth for closing remarks. .

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

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