Sun Life reaches Q1'19 milestone of $1 trillion Assets Under Management

Company reports underlying net income of $717 million and reported net income of $623 million

The information in this document is based on the unaudited interim financial results of Sun Life Financial Inc. ("SLF Inc.") for the period ended March 31, 2019. SLF Inc., its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as "the Company", "Sun Life Financial", "we", "our", and "us". Unless otherwise noted, all amounts are in Canadian dollars.

TORONTO, May 8, 2019 /CNW/ - Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) today announced its results for the first quarter ended March 31, 2019. First quarter reported net income was $623 million and underlying net income⁽¹⁾ was $717 million.

"We've delivered a strong first quarter with underlying net income of $717 million, up 9% over the prior year excluding the one-time interest on par seed capital, and 14% growth in the value of new business," said Dean Connor, President and CEO, Sun Life Financial. "We also achieved a major milestone with more than one trillion dollars of assets under management as at March 31, 2019. We are pleased to announce an increase in our common share dividend by 5% to $0.525 and our intention to amend our normal course issuer bid to allow for the purchase of an additional four million common shares."

Connor added "We continue to drive outcomes that reflect our Purpose and make it easier to do business with us. For example, in the U.S., the newly launched Sun Life and Maxwell Health digital platform offers employees of our Group Benefits plans the support they need to make personalized benefit decisions through a faster and more intuitive experience. And in Canada, Sun Life has collaborated with Rise People Inc. to offer an integrated human resources, payroll and benefits solution that drives greater value for employers and employees through a digital experience."

Financial and Operational Highlights - Quarterly Comparison (Q1 2019 vs. Q1 2018)

Our strategy is focused on four key pillars of growth, where we aim to be a leader in the markets in which we operate. We detail our continued progress in the four pillars below.

Our reported net income of $623 million in the first quarter of 2019 decreased $46 million from the first quarter of 2018, while underlying net income decreased $53 million to $717 million. This variance was primarily due to interest on par seed capital of $110 million in the first quarter of 2018⁽¹⁾ and unfavourable credit experience, partially offset by favourable mortality, lapse and other policyholder behaviour, investing activity gains, morbidity experience and other experience. In addition, underlying net income increased by $22 million as a result of the impact of foreign exchange.

Our reported ROE⁽²⁾ was 11.5% in the first quarter of 2019. Underlying ROE⁽²⁾ was 13.3%, compared to 15.1% in the first quarter of 2018, reflecting higher underlying net income in the first quarter of 2018 and increased common shareholders' equity due to higher retained earnings and the impact of foreign exchange reflected in other comprehensive income ("OCI"). Our dividend is increasing by $0.025, from $0.50 to $0.525. SLF Inc. and its wholly-owned holding companies had $2,564 million in cash and other liquid assets as at March 31, 2019.

A Leader in Insurance and Wealth Solutions in our Canadian Home Market
SLF Canada's reported net income of $237 million in the quarter decreased 5% compared to the same period in 2018, reflecting improved market related impacts more than offset by the change in underlying net income, which decreased $58 million due to interest on par seed capital of $75 million in the first quarter of 2018 and unfavourable credit experience, partially offset by strong business growth across all business units and investing activity gains.

SLF Canada insurance sales increased 22% to $362 million in the first quarter of 2019, primarily driven by large case sales in Group Benefits ("GB") and increased sales in individual insurance. Wealth sales decreased 26% compared to the same quarter in the prior year, reflecting a large case sale in Group Retirement Services ("GRS") in the first quarter of 2018. Individual wealth sales were down 13% reflecting a weaker RRSP season across the industry.

We have maintained our leadership position in our GB business, ranking #1 based on 2018 year-end insured premiums and non- insured deposits.⁽³⁾ Combined with our #1 ranked GRS business⁽⁴⁾, this allows us to bring Clients a total benefits offering, which includes integrated seamless solutions across benefits and pensions.

We continue our focus on addressing the needs of Canadians and shaping the industry in response to those needs, offering coverages that reflect changing demographics, society and social values. During the quarter, SLF Canada was the first major group benefits provider to offer gender affirmation coverage, in line with our previous industry firsts such as virtual health care coverage and provider search with user ratings.

A Leader in U.S. Group Benefits
Reported net income for SLF U.S. was $124 million, up $28 million from the same quarter in the prior year, and underlying net income was $150 million, up $21 million. Both reported and underlying net income were driven by strong mortality and morbidity experience, partially offset by interest on par seed capital of $35 million in the first quarter of 2018, unfavourable credit experience and lower investing activity gains. The after-tax profit margin for Group Benefits⁽¹⁾ was 7.9% as of the first quarter of 2019 reflecting favourable medical stop-loss experience, compared to 5.6% as of the first quarter of 2018.

SLF U.S. Group Benefits sales in U.S. dollars increased 11% compared to the same quarter in 2018, driven by increased medical stop- loss sales, reflecting our strong momentum and leadership position in the market.

Leveraging our Maxwell Health acquisition, we launched a combined digital platform providing employers and their employees with an intuitive digital benefits experience. In addition to supporting the complete portfolio of Sun Life benefits, the new Sun Life + Maxwell Health platform also enrolls health insurance from third parties, provides real-time, 24/7 access to data and automates HR tasks. This advanced technology solution makes it easy for members to understand the benefit options available, which helps people get the coverage they need.

A Leader in Global Asset Management
SLF Asset Management's reported net income of $219 million was up 4% from the first quarter of 2018 reflecting lower fair value adjustments on MFS Investment Management's ("MFS") share-based payment awards. Underlying net income was $227 million in the first quarter of 2019, down 2% from the first quarter of 2018, reflecting lower average net assets, largely offset by favourable investment income, including return on seed capital, and the impact of foreign exchange. The pre-tax net operating profit margin ratio for MFS⁽¹⁾ was 38%, consistent with the first quarter of 2018.

SLF Asset Management ended the first quarter with $698.4 billion in assets under management, consisting of $631.1 billion (US$472.9 billion) from MFS and $67.3 billion from Sun Life Investment Management ("SLIM"). MFS's net outflows of $7.8 billion (US$5.9 billion) in the quarter were partially offset by SLIM net inflows of $1.3 billion. MFS reported record U.S. retail sales in the first quarter of 2019, resulting in positive net flows of $0.9 billion (US$0.7 billion) for mutual funds.

MFS continued to rank in the top ten in the 2019 Barron's Fund Family Rankings. For 10 of the last 11 years, MFS has been in the top ten ranking for both the ten-year and the five-year firm-wide performance categories. In the first quarter of 2019, 94%, 85% and 82% of MFS's retail fund assets ranked in the top half of their Lipper categories based on ten-, five- and three-year performance, respectively.

A Leader in Asia through Distribution Excellence in Higher Growth Markets
SLF Asia's reported net income of $80 million was down $53 million from the first quarter of 2018 reflecting unfavourable market related impacts. Underlying net income of $122 million was down $6 million from the first quarter of 2018, due to unfavourable credit and mortality experience, partially offset by investing activity gains and favourable joint venture experience.

SLF Asia insurance sales were $258 million in the first quarter of 2019, up 11% compared to the first quarter of 2018, with double- digit growth in six of seven Insurance and Wealth markets. SLF International experienced lower sales due to the competitive environment and market shifts. SLF Asia wealth sales were down by 50% to $1.9 billion in the first quarter of 2019, compared to $3.7 billion in the first quarter of 2018. This decrease was mainly attributable to lower mutual fund sales in India due to market volatility, and in the Philippines due to elevated money market sales in the first quarter of 2018. Our Hong Kong pension business experienced comparable sales to the first quarter of 2018.

We continue to invest in our distribution capabilities. For example, our agency headcount has grown 35% in the Philippines since the first quarter of 2018, we have established a broker channel in Vietnam and we continue expanding our bancassurance footprint in India through our distribution agreement with HDFC Bank Limited. In addition, SLF Asia was recognized with awards in Hong Kong⁽²⁾ and Indonesia⁽³⁾ for our My Sun Life Client app, and as the "Most Innovative Takaful Provider"⁽⁴⁾ in Malaysia. As well, our Hong Kong Rainbow MPF⁽⁵⁾ plan won 12 awards at the 2019 MPF awards,⁽⁶⁾ including the inaugural Employer's Choice Award, where we were recognized for our focus on employer servicing, features and benefits.

Sun Life Financial Inc.

For the period ended March 31, 2019
Dated May 8, 2019

About Sun Life Financial
Sun Life Financial Inc. ("SLF Inc.") is a leading international financial services organization providing insurance, wealth and asset management solutions to individual and corporate Clients. Sun Life Financial has operations in a number of markets worldwide, including Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia and Bermuda. As of March 31, 2019, Sun Life Financial had total assets under management ("AUM") of $1,011 billion. For more information please visit www.sunlife.com.

Sun Life Financial Inc. trades on the Toronto (TSX), New York (NYSE) and Philippine (PSE) stock exchanges under the ticker symbol SLF.

A. How We Report Our Results

Sun Life Financial Inc. ("SLF Inc."), its subsidiaries and, where applicable, its joint ventures and associates are collectively referred to as "the Company", "Sun Life Financial", "we", "our", and "us". We manage our operations and report our financial results in five business segments: Sun Life Financial Canada ("SLF Canada"), Sun Life Financial United States ("SLF U.S."), Sun Life Financial Asset Management ("SLF Asset Management"), Sun Life Financial Asia ("SLF Asia"), and Corporate. Information concerning these segments is included in our annual and interim consolidated financial statements and accompanying notes ("Annual Consolidated Financial Statements" and "Interim Consolidated Financial Statements", respectively, and "Consolidated Financial Statements", collectively) and interim and annual management's discussion and analysis ("MD&A"). We prepare our unaudited Interim Consolidated Financial Statements using International Financial Reporting Standards ("IFRS"), including in accordance with the International Accounting Standard ("IAS") 34 Interim Financial Reporting. Reported net income (loss) refers to Common shareholders' net income (loss) determined in accordance with IFRS.

The information in this document is in Canadian dollars unless otherwise noted.

1.  Use of Non-IFRS Financial Measures

We report certain financial information using non-IFRS financial measures, as we believe that these measures provide information that is useful to investors in understanding our performance and facilitate a comparison of our quarterly and full year results from period to period. These non-IFRS financial measures do not have any standardized meaning and may not be comparable with similar measures used by other companies. For certain non-IFRS financial measures, there are no directly comparable amounts under IFRS. These non-IFRS financial measures should not be viewed as alternatives to measures of financial performance determined in accordance with IFRS. Additional information concerning these non-IFRS financial measures and reconciliations to the closest IFRS measures are available in section M - Non-IFRS Financial Measures in this document. Non-IFRS Financial Measures and reconciliations are also included in our annual and interim MD&As and the Supplementary Financial Information packages that are available on www.sunlife.com under Investors – Financial results & reports.

2.  Forward-looking Statements

Certain statements in this document are forward-looking statements within the meaning of certain securities laws, including the "safe harbour" provisions of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Additional information concerning forward-looking statements and important risk factors that could cause our assumptions, estimates, expectations and projections to be inaccurate and our actual results or events to differ materially from those expressed in or implied by such forward-looking statements can be found in section N - Forward-looking Statements in this document.

3.  Additional Information

Additional information about SLF Inc. can be found in the Annual and Interim Consolidated Financial Statements, the annual and interim MD&As and SLF Inc.'s Annual Information Form ("AIF") for the year ended December 31, 2018. These documents are filed with securities regulators in Canada and are available at www.sedar.com. SLF Inc.'s Annual Consolidated Financial Statements, annual MD&A and AIF are filed with the United States Securities and Exchange Commission ("SEC") in SLF Inc.'s annual report on Form 40-F and SLF Inc.'s interim MD&As and Interim Consolidated Financial Statements are furnished to the SEC on Form 6-Ks and are available at www.sec.gov.

B. Financial Summary

C.  Profitability

The following table reconciles our reported net income and underlying net income. The table also sets out the impact that other notable items had on our reported net income and underlying net income. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

Quarterly Comparison - Q1 2019 vs. Q1 2018

Our reported net income of $623 million in the first quarter of 2019 decreased $46 million from the first quarter of 2018, while underlying net income decreased $53 million to $717 million. This variance was primarily due to interest on par seed capital of $110 million in the first quarter of 2018 and unfavourable credit experience, partially offset by favourable mortality, lapse and other policyholder behaviour, investing activity gains, morbidity experience and other experience. In addition, underlying net income increased by $22 million as a result of the impact of foreign exchange. Business growth was negatively affected by average net asset declines in our fee income businesses relative to the first quarter of 2018, substantially offset by business growth in insurance businesses.

1. Market related impacts
   
   Market related impacts in the first quarter of 2019 compared to the same period last year reflected unfavourable net interest rate impacts, substantially offset by favourable net equity market impacts.
   
2. Assumption changes and management actions
   
   The effects of assumption changes and management actions ("ACMA") decreased reported net income by $11 million during the first quarter of 2019 compared to $3 million in the first quarter of 2018.
   
3. Other adjustments
   
   Other adjustments decreased reported net income by $14 million in the first quarter of 2019 compared to a decrease of $30 million in the first quarter of 2018. The reduced impact was primarily due to Fair value adjustments on MFS's share-based payment awards.
   
4. Experience related items
   
   Favourable variances in morbidity, mortality, and lapse and other policyholder experience were driven predominantly by SLF U.S. Favourable expense experience arose mainly from expense discipline across the organization. Favourable investing activity gains were predominantly in SLF Canada. Unfavourable credit experience related to downgrades of indirect exposures to a single name in the utilities sector of $57 million, and was reflected in SLF Canada, SLF U.S. and SLF Asia.
   
   Other experience results for the first quarter of 2018 include the impact of accrued investment income on seed capital of $110 million - $75 million in SLF Canada and $35 million in SLF U.S. ("interest on par seed capital"), partially offset by a mix of smaller items. For further information please see Note 10.C in the first quarter 2019 Interim Consolidated Financial Statements.
   
5. Income taxes
   
   Our statutory tax rate is normally reduced by various tax benefits, such as lower taxes on income subject to tax in foreign jurisdictions, a range of tax exempt investment income, and other sustainable tax benefits that are expected to decrease our effective tax rate.
   
   In the first quarter of 2019, our effective income tax rates on reported net income and underlying net income⁽¹⁾ were 11.0% and 17.8% compared to 16.4% and 15.8% in the first quarter of 2018, respectively. Our effective tax rate on underlying net income is within our expected range of 15% to 20%.
   
6. Impact of foreign exchange rates
   
   During the first quarter of 2019, our reported net income and underlying net income increased by $21 million and $22 million, respectively, as a result of the impact of the movement of the Canadian dollar in the first quarter of 2019 relative to the average exchange rates in the first quarter of 2018.

D. Growth

1. Sales and Value of New Business

Total Company insurance sales were $780 million in the first quarter of 2019, up 17% (16% on a constant currency basis) compared to the same period in 2018.

• SLF Canada insurance sales increased mainly due to large case sales in Group Benefits ("GB") and higher individual insurance sales.
• SLF U.S. insurance sales increased mainly driven by higher medical stop-loss sales.
• SLF Asia insurance sales were up 10% on a constant currency basis, reflecting double-digit sales growth in six of seven Insurance and Wealth markets, and lower sales in International.

Total Company wealth sales were $36.0 billion in the first quarter of 2019, down 10% (13% on a constant currency basis) compared to the first quarter of 2018.

• SLF Canada wealth sales decreased, reflecting decreases in Group Retirement Services ("GRS") and individual wealth.
• SLF Asia wealth sales were down, primarily reflecting lower sales in India and the Philippines.
• SLF Asset Management gross sales were lower, primarily reflecting lower managed fund sales, partially offset by the impact of foreign exchange and higher mutual fund sales in MFS Investment Management's ("MFS").

The Company's total VNB in the first quarter of 2019 was $382 million, up 14% compared to the first quarter of 2018, driven by overall higher life and group insurance sales and improved pricing in SLF U.S.

2.  Premiums and Deposits

Net premium revenue was $4.4 billion, down $0.3 billion from the first quarter of 2018, primarily due to lower premium revenue in GRS in SLF Canada and International in SLF Asia, partially offset by SLF U.S. and the impact of foreign exchange.

Segregated fund deposits were $3.1 billion in the first quarter of 2019, down from the first quarter of 2018, due to lower deposits in SLF Canada.

Sales of mutual funds were $23.7 billion in the first quarter of 2019, down from the first quarter of 2018, reflecting decreased sales in India and the Philippines in SLF Asia, partially offset by the impact of foreign exchange, and increased sales in MFS.

Sales of managed funds were $10.0 billion in the first quarter of 2019, a decrease of $2.4 billion from the first quarter of 2018, primarily due to lower sales in MFS and Sun Life Investment Management ("SLIM"), partially offset by the impact of foreign exchange.

ASO premium and deposit equivalents in the first quarter of 2019 remain largely consistent with the same period in 2018.

The currency impact for total premium and deposits for the first quarter of 2019 from the change in the Canadian dollar relative to average exchange rates in the first quarter of 2018 increased total premiums and deposits by approximately $1.6 billion.

3.  Assets Under Management

AUM consist of general funds, segregated funds and other AUM. Other AUM includes mutual funds and managed funds, which include institutional and other third-party assets managed by the Company.

AUM were $1,011.4 billion as at March 31, 2019, compared to AUM of $951.1 billion as at December 31, 2018. The increase in AUM of $60.3 billion between December 31, 2018 and March 31, 2019 resulted primarily from:

For the first quarter of 2019, net outflows of mutual, managed and segregated funds were $7.1 billion, predominantly driven by net outflows from MFS of $7.8 billion and $0.5 billion from SLF Canada, partially offset by net inflows of $1.3 billion from SLIM.

E. Financial Strength

The Office of the Superintendent of Financial Institutions ("OSFI") implemented a revised regulatory capital framework referred to as the Life Insurance Capital Adequacy Test in Canada effective January 1, 2018. LICAT measures the capital adequacy of an insurer using a risk-based approach and includes elements that contribute to financial strength through periods when an insurer is under stress as well as elements that contribute to policyholder and creditor protection wind-up. In 2019, OSFI made a number of revisions to their LICAT guideline. The two notable revisions for SLF Inc. and Sun Life Assurance were the IFRS 16 Leases ("IFRS 16") accounting change and the additional group morbidity and mortality risk requirements for group insurance businesses.

SLF Inc. is a non-operating insurance company and is subject to the LICAT guideline. As at March 31, 2019, SLF Inc.'s LICAT ratio was 145%, compared to 144% as at December 31, 2018. The change was primarily due to the favourable contribution of reported net income and market movements, partially offset by dividends and repurchases of common shares and the unfavourable impact from OSFI's LICAT guideline revisions. The SLF Inc. LICAT ratios in both periods are well above OSFI's regulatory minimum ratio of 90%.

Sun Life Assurance, SLF Inc.'s principal operating life insurance subsidiary in Canada, is also subject to the LICAT guideline. As at March 31, 2019, Sun Life Assurance's LICAT ratio was 132%, compared to 131% as at December 31, 2018. The change was primarily due to the favourable contribution of reported net income and market movements, partially offset by dividends and the unfavourable impact from OSFI's LICAT guideline revisions. The Sun Life Assurance LICAT ratios in both periods are well above OSFI's supervisory ratio of 100% and regulatory minimum ratio of 90%.

Our total capital consists of subordinated debt and other capital instruments, participating policyholders' equity and total shareholders' equity, which includes common shareholders' equity and preferred shareholders' equity. As at March 31, 2019, our total capital was $28.5 billion, compared to $28.3 billion as at December 31, 2018. The increase in total capital was primarily the result of total net income of $714 million and unrealized gains on available-for-sale ("AFS") assets of $251 million, partially offset by the payment of $299 million of dividends on common shares, foreign currency translation loss of $280 million included in other comprehensive income (loss) and common shares purchased under SLF Inc.'s normal course issuer bid of $200 million detailed below.

SLF Inc. and its wholly-owned holding companies had $2,564 million in cash and other liquid assets as at March 31, 2019 ($2,523 million as at December 31, 2018). The increase in cash and other liquid assets in the first quarter of 2019 was primarily attributable to the dividends from the operating companies including Sun Life Assurance, which were partially offset by the payment of $299 million of dividends on common shares, and the repurchase of $200 million of common shares. Other liquid assets as noted above include cash equivalents, short-term investments and publicly traded securities.

On March 14, 2019, SLF Inc. announced its intention to redeem all of the outstanding $250 million principal amount of Series 2014-1 Subordinated Unsecured 2.77% Fixed/Floating Debentures ("Series 2014-1 Debentures") on May 13, 2019 in accordance with the redemption terms attached to such debentures. The redemption will be funded from existing cash and other liquid assets.

During the quarter, both Standard & Poor's and Fitch upgraded the financial strength ratings of Sun Life Assurance to AA from AA-.

Normal Course Issuer Bid
On August 14, 2018, SLF Inc. renewed its normal course issuer bid. This normal course issuer bid remains in effect until the earlier of August 13, 2019 and the date on which SLF Inc. has purchased an aggregate of 14.0 million common shares under the bid. During the first quarter of 2019, SLF Inc. purchased approximately 4.0 million common shares at a total cost of $200 million. All of the common shares purchased under SLF Inc.'s normal course issuer bid were subsequently cancelled. As at March 31, 2019, the total aggregate shares cancelled and associated cost under SLF Inc.'s normal course issuer bid are 12.6 million and $625 million, respectively.

Subject to the approval of OSFI and the Toronto Stock Exchange, SLF Inc. intends to amend its existing normal course issuer bid to increase the number of common shares that it may purchase for cancellation from 14 million common shares to 18 million common shares.

F. Performances by Business Group

Information describing the business groups and their respective business units is included in our 2018 annual MD&A. All factors discussed in this document that impact our underlying net income are also applicable to reported net income.

1.  SLF Canada

Profitability

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF Canada's reported net income was $237 million in the first quarter of 2019, compared to $249 million in the first quarter of 2018. Underlying net income in the first quarter of 2019 was $237 million, compared to $295 million in the first quarter of 2018.

Reported net income in the first quarter of 2019 compared to the first quarter of 2018 reflected improved market related impacts, primarily favourable net equity market impacts, partially offset by more unfavourable net interest rate impacts. Underlying net income was lower from the same period in 2018, due to interest on par seed capital of $75 million in the first quarter of 2018 and unfavourable credit experience, partially offset by strong business growth across all business units and investing activity gains.

Growth

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF Canada individual insurance sales increased by 6% in the first quarter of 2019 to $93 million. Sales in GB of $269 million increased 29% due to large case sales.

SLF Canada wealth sales of $2.8 billion in the first quarter of 2019 were down compared to $3.8 billion in the first quarter of 2018, primarily due to a decrease in GRS sales of 38% to $1.2 billion, due to a large case defined benefit sale in the first quarter of 2018, and lower defined contribution sales in 2019. Individual wealth sales of $1.6 billion decreased 13% reflecting a weaker RRSP season across the industry.

2.  SLF U.S.

Profitability

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF U.S.'s reported net income was US$93 million ($124 million) in the first quarter of 2019, compared to reported net income of US$76 million ($96 million) in the first quarter of 2018. Underlying net income was US$112 million ($150 million), compared to US$102 million ($129 million) in the first quarter of 2018. The impact of foreign exchange increased reported net income and underlying net income by $6 million and $7 million, respectively.

Reported net income in the first quarter of 2019 compared to reported net income in the first quarter of 2018 reflected improved market related impacts primarily driven by the impact of changes in the fair value of investment properties. Underlying net income improved compared to the first quarter of 2018, primarily driven by favourable morbidity and mortality experience, and improvements in lapse and other policyholder behaviour experience. These variances were partially offset by interest on par seed capital of US$28 million ($35 million) in the first quarter of 2018, unfavourable credit experience and lower investing activity gains. The after-tax profit margin for Group Benefits was 7.9% as of the first quarter of 2019, reflecting favourable medical stop-loss experience related items, compared to 5.6% as of the first quarter of 2018.

Growth

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF U.S. Group Benefits sales of US$120 million in the first quarter of 2019 increased 11% compared to the first quarter of 2018 of US$108 million, driven by an increase in medical stop-loss sales reflecting our strong momentum and leadership position in the market.

3.  SLF Asset Management

Profitability

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF Asset Management's reported net income was $219 million in the first quarter of 2019, compared to $210 million in the first quarter of 2018. SLF Asset Management had underlying net income of $227 million in the first quarter of 2019, compared to $231 million in the first quarter of 2018. The impact of foreign exchange increased both reported net income and underlying net income by $11 million.

SLF Asset Management's higher reported net income compared to the same quarter in 2018 reflected reduced Fair value adjustments on MFS's share-based payment awards. Underlying net income was in line with the first quarter of 2018. The unfavourable impact of lower average net assets in MFS was largely offset by favourable investment income including returns on seed capital and the impact of foreign exchange.

In U.S. dollars, MFS's reported net income was US$162 million in the first quarter of 2019, compared to US$159 million in the first quarter of 2018, reflecting reduced fair value adjustments on share-based payment awards. MFS's underlying net income was US $168 million in the first quarter of 2019, compared to US$176 million in the first quarter of 2018. Underlying net income compared to the first quarter of 2018 reflected lower average net assets, partially offset by favourable results in investment income including returns on seed capital. The pre-tax net operating profit margin ratio for MFS was 38%, consistent with the first quarter of 2018.

Growth
SLF Asset Management's AUM was $698.4 billion as at March 31, 2019, compared to $649.7 billion as at December 31, 2018. The increase in AUM was primarily due to asset appreciation, partially offset by the impact of foreign exchange and net outflows. MFS's AUM was US$472.9 billion ($631.1 billion) as at March 31, 2019, compared to US$428.4 billion ($584.2 billion) as at December 31, 2018. The increase of US$44.5 billion was primarily driven by asset appreciation of US$50.4 billion and gross sales of US$21.8 billion, partially offset by redemptions of US$27.7 billion. MFS reported record U.S. retail sales in the first quarter of 2019, resulting in positive net flows of US$0.7 billion for mutual funds.

In the first quarter of 2019, 94%, 85% and 82% of MFS's retail fund assets ranked in the top half of their Lipper categories based on ten-, five-, and three-year performance, respectively.

SLIM's AUM was $67.3 billion as at March 31, 2019, compared to $65.5 billion as at December 31, 2018. Net inflows in the first quarter of 2019 of $1.3 billion exceeded net inflows in the first quarter of 2018 by $1.0 billion.

4.  SLF Asia

Profitability

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF Asia's reported net income was $80 million in the first quarter of 2019, compared to reported net income of $133 million in the first quarter of 2018. Underlying net income was $122 million, compared to $128 million in the first quarter of 2018. The impact of foreign exchange increased reported net income and underlying net income by $3 million and $4 million, respectively.

Reported net income in the first quarter of 2019 compared to the first quarter of 2018 reflected unfavourable market related impacts, primarily net interest rate impacts. Underlying net income reflected unfavourable credit and mortality experience, partially offset by investing activity gains and favourable joint venture experience.

Growth

Quarterly Comparison - Q1 2019 vs. Q1 2018
SLF Asia insurance sales were $258 million in the first quarter of 2019, compared to $233 million in the first quarter of 2018. Total individual insurance sales increased 13%, driven by double-digit growth in six of seven Insurance and Wealth markets. SLF International experienced lower sales due to the competitive environment and market shifts. On a constant currency basis, insurance sales increased 10%.

SLF Asia wealth sales were $1.9 billion in the first quarter of 2019, compared to $3.7 billion in the first quarter of 2018. The decrease mainly reflects lower mutual fund sales in India due to market volatility and in the Philippines due to elevated money market sales in the first quarter of 2018. Our Hong Kong pension business experienced comparable sales to the first quarter of 2018.

5.  Corporate

Profitability

Quarterly Comparison - Q1 2019 vs. Q1 2018
Reported net loss in Corporate was $37 million in the first quarter of 2019, compared to reported net loss of $19 million in the first quarter of 2018. Underlying net loss was $19 million, compared to underlying net loss of $13 million in the first quarter of 2018. The change in reported net loss was largely due to ACMA and lower investment activity gains in SLF U.K.

SLF U.K.'s reported net income in the first quarter of 2019 decreased compared to the first quarter of 2018 and was impacted by ACMA and lower investment activity gains.

Corporate Support had a reported net loss of $66 million in the first quarter of 2019, in line with the reported net loss of $67 million in the first quarter of 2018.

G.  Investments

We had total general fund invested assets of $154.3 billion as at March 31, 2019, compared to $151.7 billion as at December 31, 2018. The increase in general fund invested assets was primarily due to changes in net fair value growth, partially offset by the currency impact of the strengthening Canadian dollar and operational activity. Our general fund invested assets are well diversified across investment types, geographies and sectors with the majority of our portfolio invested in fixed income high-quality assets.

The following table sets out the composition of our general fund invested assets.⁽¹⁾

1.  Debt Securities
Our debt securities portfolio is actively managed through a regular program of purchases and sales aimed at optimizing yield, quality and liquidity, while ensuring that it remains well diversified and duration-matched to insurance contract liabilities. With the exception of certain countries where we have business operations, including Canada, the United States, the United Kingdom and the Philippines, our exposure to debt securities from any single country did not exceed 1% of total invested assets on our Interim Consolidated Financial Statements as at March 31, 2019.

The carrying value of FVTPL and AFS debt securities by geographic location is presented in the following table.

Our debt securities with a credit rating of "A" or higher represented 73% of the total debt securities as at March 31, 2019, compared to 72% as at December 31, 2018. Debt securities with a credit rating of "BBB" or higher represented 99% of total debt securities as at March 31, 2019, consistent with December 31, 2018.

Our gross unrealized losses as at March 31, 2019 for FVTPL and AFS debt securities were $0.4 billion and $0.1 billion, respectively, compared with $1.4 billion and $0.2 billion, respectively, as at December 31, 2018. The decrease in gross unrealized losses was largely due to the impact from declining interest rates and the narrowing of credit spreads.

2.  Mortgages and Loans
Mortgages and loans disclosures in this section are presented at their carrying value on our Interim Consolidated Financial Statements. Our mortgage portfolio consisted almost entirely of first mortgages and our loan portfolio consisted of private placement loans.

The carrying value of mortgages and loans by geographic location is presented in the following table.⁽¹⁾

As at March 31, 2019, we held $16.6 billion of mortgages, compared to $16.4 billion as at December 31, 2018. Our mortgage portfolio consists entirely of commercial mortgages, including retail, office, multi-family, industrial and land properties. As at March 31, 2019, 34% of our commercial mortgage portfolio consisted of multi-family residential mortgages; there are no single family residential mortgages. Our uninsured commercial portfolio had a weighted average loan-to-value ratio of approximately 55% as at March 31, 2019, consistent with December 31, 2018. While we generally limit the maximum loan-to-value ratio to 75% at issuance, we may invest in mortgages with a higher loan-to-value ratio in Canada if the mortgage is insured by the Canada Mortgage and Housing Corporation ("CMHC"). The estimated weighted average debt service coverage for our uninsured commercial portfolio is 1.76 times. Of the $3.8 billion of multi-family residential mortgages in the Canadian commercial mortgage portfolio, 93% were insured by the CMHC.

As at March 31, 2019, we held $31.0 billion of loans, compared to $30.4 billion as at December 31, 2018. Private placement loans provide diversification by type of loan, industry segment and borrower credit quality. The private placement loan portfolio consists of senior secured and unsecured loans to large- and mid-market sized corporate borrowers, securitized lease/loan obligations secured by a variety of assets, and project finance loans in sectors such as power and infrastructure.

Mortgages and Loans Past Due or Impaired
The gross carrying value and allowance for mortgages and loans past due or impaired are presented in the following table.

Our impaired mortgages and loans, net of allowance for losses, were $42 million as at March 31, 2019, compared to $49 million as at December 31, 2018.

3.  Derivative Financial Instruments
The values associated with our derivative instruments are presented in the following table. Notional amounts serve as the basis for payments calculated under derivatives contracts and are generally not exchanged.

The net fair value of derivatives was a liability of $332 million as at March 31, 2019, compared to a liability of $1,183 million as at December 31, 2018. The increase in net fair value was primarily due to the impact of the strengthening of the Canadian dollar against the U.S. dollar on foreign exchange contracts, as well as the impact of downward shifts in yield curves.

4.  Asset Default Provision
We make provisions for possible future credit events in the determination of our insurance contract liabilities. The amount of the provision for asset default included in insurance contract liabilities is based on possible reductions in future investment yields that vary by factors such as type of asset, asset credit quality (rating), duration and country of origin. To the extent that an asset is written off, or disposed of, any amounts that were set aside in our insurance contract liabilities for possible future asset defaults in respect of that asset are released.

Our asset default provision reflects the provision relating to future credit events for fixed income assets currently held by the Company that support our insurance contract liabilities. Our asset default provision as at March 31, 2019 was $2,537 million compared to $2,389 million as at December 31, 2018. The increase of $148 million was primarily due to yield curve movement and changes in credit ratings.

H. Risk Management

The Company has established a Risk Management Framework to assist in identifying, measuring, managing, monitoring and reporting risks. The Risk Management Framework covers all risks and these have been grouped into six major categories: credit, market, insurance, business and strategic, operational and liquidity risks.

Through our enterprise risk management processes, we oversee the various risk factors identified in the Risk Management Framework and provide reports to senior management and to the Board Committees at least quarterly. Our enterprise risk management processes and risk factors are described in our annual MD&A and AIF.

When referring to segregated funds in this section, it is inclusive of segregated fund guarantees, variable annuities and investment products and includes Run-off reinsurance in our Corporate business segment.

1.  Market Risk Sensitivities
Our net income⁽¹⁾ is affected by the determination of policyholder obligations under our annuity and insurance contracts. These amounts are determined using internal valuation models and are recorded in our Consolidated Financial Statements, primarily as Insurance contract liabilities. The determination of these obligations requires management to make assumptions about the future level of equity market performance, interest rates, credit and swap spreads and other factors over the life of our products. Differences between our actual experience and our best estimate assumptions are reflected in our Consolidated Financial Statements. Refer to Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

The market value of our investments in fixed income and equity securities fluctuates based on movements in interest rates and equity markets. The market value of fixed income assets designated as AFS that are held primarily in our surplus segment increases with declining interest rates and decreases with rising interest rates. The market value of equities designated as AFS and held primarily in our surplus segment increases (decreases) with rising (declining) equity markets. Changes in the market value of AFS assets flow through other comprehensive income ("OCI") and are only recognized in net income when realized upon sale, or when considered impaired. The amount of realized gains (losses) recorded in net income in any period is equal to the unrealized gains (losses) or OCI position at the start of the period plus the change in market value during the current period up to the point of sale for those securities that were sold during the period. The sale or impairment of AFS assets held in surplus can therefore have the effect of modifying our net income sensitivity.

We realized $23 million (pre-tax) in net gains on the sale of AFS assets during the first quarter of 2019 ($36 million pre-tax in the first quarter of 2018). The net unrealized gains or OCI position on AFS fixed income and equity assets were $122 million and $73 million, respectively, after-tax as at March 31, 2019 ($(98) million and $43 million, respectively, after-tax as at December 31, 2018).

Equity Market Sensitivities
The following table sets out the estimated immediate impact on, or sensitivity of, our net income and OCI, and Sun Life Assurance's LICAT ratio to certain instantaneous changes in equity market prices as at March 31, 2019 and December 31, 2018.

Interest Rate Sensitivities
The following table sets out the estimated immediate impact on, or sensitivity of our net income and OCI, and Sun Life Assurance's LICAT ratio to certain instantaneous changes in interest rates as at March 31, 2019 and December 31, 2018.

Sun Life Assurance's LICAT ratio decreases with rising interest rates and increases with declining interest rates, which is opposite to our net income sensitivity. Increases to interest rates will reduce the value of our assets and margins in our actuarial liabilities, resulting in a lower LICAT ratio. The sensitivity of Sun Life Assurance's LICAT ratio to changes in interest rates fluctuates with changes in lapse behavior for certain products as assumed in our insurance contract liabilities, which vary with the level of short- and long-term interest rates.

Interest rate sensitivities do not include any impact from changes to the ASB promulgated URR. In 2014, the ASB made changes to the Canadian actuarial standards of practice with respect to economic reinvestment assumptions used in the valuation of insurance contract liabilities. The changes relate to assumed future interest rates, credit spreads and the use of non-fixed income assets supporting fixed obligations. When the ASB promulgated these changes, the intention was to review these assumptions every five years, or sooner if circumstances warrant. The last update to the URR was a 10 basis point reduction in 2017. Given the continuing low interest rates, the ASB has issued an exposure draft on assumptions that includes a reduction in the URR of 15 basis points. The final standard is expected to be released in the third quarter, and will be effective this year. Based on current assumptions, as at March 31, 2019, our estimated sensitivity to a 15 basis point decrease in the URR would have been a decrease in reported net income of approximately $100 million after tax. The actual impact could differ from the Company's estimate. The statements concerning expected URR changes are forward-looking.

2.  Credit Spread and Swap Spread Sensitivities
We have estimated the immediate impact or sensitivity of our net income attributable to certain instantaneous changes in credit and swap spreads. The credit spread sensitivities reflect the impact of changes in credit spreads on our asset and liability valuations (including non-sovereign fixed income assets, provincial governments, corporate bonds, and other fixed income assets). The swap spread sensitivities reflect the impact of changes in swap spreads on swap-based derivative positions and liability valuations.

The credit and swap spread sensitivities assume a parallel shift in the indicated spreads across the entire term structure. Variations in realized spread changes based on different terms to maturity, geographies, asset classes and derivative types, underlying interest rate movements, and ratings may result in realized sensitivities being significantly different from those provided above. The credit spread sensitivity estimates exclude any credit spread impact that may arise in connection with asset positions held in segregated funds. Spread sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Refer to Additional Cautionary Language and Key Assumptions Related to Sensitivities in this section for important additional information regarding these estimates.

3.  General Account Insurance and Annuity Products
Most of our expected sensitivity to changes in interest rates and about two-thirds of our expected sensitivity to changes in equity markets are derived from our general account insurance and annuity products. We have implemented market risk management strategies to mitigate a portion of the market risk related to our general account insurance and annuity products.

Individual insurance products include universal life and other long-term life and health insurance products. Major sources of market risk exposure for individual insurance products include the reinvestment risk related to future premiums on regular premium policies, asset reinvestment risk on both regular premium and single premium policies and the guaranteed cost of insurance. Interest rate risk for individual insurance products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment policy or guidelines. Targets and limits are established so that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and assets are re-balanced as necessary to maintain compliance within policy limits using a combination of assets and derivative instruments. A portion of the longer-term cash flows are backed with equities and real estate.

For participating insurance products and other insurance products with adjustability features, the investment strategy objective is to provide a total rate of return given a constant risk profile over the long term.

Fixed annuity products generally provide the policyholder with a guaranteed investment return or crediting rate. Interest rate risk for these products is typically managed on a duration basis, within tolerance ranges set out in the applicable investment guidelines. Targets and limits are established such that the level of residual exposure is commensurate with our risk appetite. Exposures are monitored frequently, and are re-balanced as necessary to maintain compliance within prescribed tolerances using a combination of fixed income assets and derivative instruments.

Certain insurance and annuity products contain minimum interest rate guarantees. Market risk management strategies are implemented to limit potential financial loss due to reductions in asset earned rates relative to contract guarantees. These typically involve the use of hedging strategies utilizing interest rate derivatives such as interest rate floors, swaps and swaptions.

Certain insurance and annuity products contain features which allow the policyholders to surrender their policy at book value. Market risk management strategies are implemented to limit the potential financial loss due to changes in interest rate levels and policyholder behaviour. These typically involve the use of hedging strategies such as dynamic option replication and the purchase of interest rate swaptions.

Certain products have guaranteed minimum annuitization rates. Market risk management strategies are implemented to limit the potential financial loss and typically involve the use of fixed income assets, interest rate swaps, and swaptions.

4.  Segregated Fund Guarantees
Approximately one-third of our equity market sensitivity and a small amount of interest rate risk sensitivity as at March 31, 2019 are derived from segregated fund products. These products provide benefit guarantees, which are linked to underlying fund performance and may be triggered upon death, maturity, withdrawal or annuitization. The cost of providing these guarantees is uncertain and depends upon a number of factors including general capital market conditions, our hedging strategies, policyholder behaviour and mortality experience, each of which may result in negative impacts on net income and capital.

The following table provides information with respect to the guarantees provided for our segregated fund products.

The movement of the items in the table above from December 31, 2018 to March 31, 2019 primarily resulted from the following factors:

5.  Segregated Fund Hedging
Our hedging programs use derivative instruments to mitigate the interest and equity related exposure of our segregated fund contracts. As at March 31, 2019, over 90% of our segregated fund contracts, as measured by associated fund values, were included in a hedging program. While a large percentage of contracts are included in the hedging program, not all of our market risk exposure related to these contracts is hedged. For those segregated fund contracts included in the hedging program, we generally hedge the value of expected future net claims costs and associated margins.

The following table illustrates the impact of our hedging program related to our sensitivity to a 50 basis point decrease in interest rates and a 10% and 25% decrease in equity markets for segregated fund contracts as at March 31, 2019 and December 31, 2018.

Impact of Segregated Fund Hedging

6.  Real Estate Risk
Real estate risk is the potential for financial loss arising from fluctuations in the value of, or future cash flows from our investments in real estate. We are exposed to real estate risk and may experience financial losses resulting from the direct ownership of real estate investments or indirectly through fixed income investments secured by real estate property, leasehold interests, ground rents, and purchase and leaseback transactions. Real estate price risk may arise from external market conditions, inadequate property analysis, inadequate insurance coverage, inappropriate real estate appraisals, or from environmental risk exposures. We hold direct real estate investments that support general account liabilities and surplus, and fluctuations in value will impact our profitability and financial position. A material and sustained increase in interest rates may lead to deterioration in real estate values. An instantaneous 10% decrease in the value of our direct real estate investments as at March 31, 2019 would decrease net income⁽¹⁾ by approximately $275 million ($275 million decrease as at December 31, 2018). Conversely, an instantaneous 10% increase in the value of our direct real estate investments as at March 31, 2019 would increase net income by approximately $275 million ($275 million increase as at December 31, 2018).

7.  Additional Cautionary Language and Key Assumptions Related to Sensitivities
Our market risk sensitivities are measures of our estimated change in net income and OCI for changes in interest rates and equity market price levels described above, based on interest rates, equity market prices and business mix in place as at the respective calculation dates. These sensitivities are calculated independently for each risk factor, generally assuming that all other risk variables stay constant. The sensitivities do not take into account indirect effects such as potential impacts on goodwill impairment or valuation allowances on deferred tax assets. The sensitivities are provided for the consolidated entity and may not be proportional across all reporting segments. Actual results can differ materially from these estimates for a variety of reasons, including differences in the pattern or distribution of the market shocks, the interaction between these risk factors, model error, or changes in other assumptions such as business mix, effective tax rates, policyholder behaviour, currency exchange rates and other market variables relative to those underlying the calculation of these sensitivities. The extent to which actual results may differ from the indicative ranges will generally increase with larger capital market movements. Our sensitivities as at December 31, 2018 have been included for comparative purposes only.

We have also provided measures of our net income sensitivity to instantaneous changes in credit spreads, swap spreads, real estate price levels, and capital sensitivities to changes in interest rates and equity price levels. The real estate sensitivities are non-IFRS financial measures. For additional information, see section M - Non-IFRS Financial Measures in this document. The cautionary language which appears in this section is also applicable to the credit spread, swap spread, real estate, and LICAT ratio sensitivities. In particular, these sensitivities are based on interest rates, credit and swap spreads, equity market, and real estate price levels as at the respective calculation dates and assume that all other risk variables remain constant. Changes in interest rates, credit and swap spreads, equity market, and real estate prices in excess of the ranges illustrated may result in other-than-proportionate impacts.

As these market risk sensitivities reflect an instantaneous impact on net income and OCI, they do not include impacts over time such as the effect on fee income in our asset management businesses.

The sensitivities reflect the composition of our assets and liabilities as at March 31, 2019 and December 31, 2018, respectively. Changes in these positions due to new sales or maturities, asset purchases/sales, or other management actions could result in material changes to these reported sensitivities. In particular, these sensitivities reflect the expected impact of hedging activities based on the hedge programs in place as at the March 31 and December 31 calculation dates. The actual impact of hedging activity can differ materially from that assumed in the determination of these indicative sensitivities due to ongoing hedge re-balancing activities, changes in the scale or scope of hedging activities, changes in the cost or general availability of hedging instruments, basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), model risk, and other operational risks in the ongoing management of the hedge programs or the potential failure of hedge counterparties to perform in accordance with expectations.

The sensitivities are based on methods and assumptions in effect as at March 31, 2019 and December 31, 2018, as applicable. Changes in the regulatory environment, accounting or actuarial valuation methods, models, or assumptions (including changes to the ASB promulgated URR) after those dates could result in material changes to these reported sensitivities. Changes in interest rates and equity market prices in excess of the ranges illustrated may result in other than proportionate impacts.

Our hedging programs may themselves expose us to other risks, including basis risk (i.e., the risk that hedges do not exactly replicate the underlying portfolio experience), volatility risk, derivative counterparty credit risk, and increased levels of liquidity risk, model risk and other operational risks. These factors may adversely impact the net effectiveness, costs, and financial viability of maintaining these hedging programs and therefore adversely impact our profitability and financial position. While our hedging programs are intended to mitigate these effects (e.g., hedge counterparty credit risk is managed by maintaining broad diversification, dealing primarily with highly rated counterparties, and transacting through over-the-counter contracts, cleared through central clearing houses, exchange-traded contracts or bilateral over-the-counter contracts negotiated directly between counterparties that include credit support annexes), residual risk, potential reported earnings and capital volatility remain.

For the reasons outlined above, our sensitivities should only be viewed as directional estimates of the underlying sensitivities of each factor under these specialized assumptions, and should not be viewed as predictors of our future net income, OCI, and capital. Given the nature of these calculations, we cannot provide assurance that actual impact will be consistent with the estimates provided.

Information related to market risk sensitivities and guarantees related to segregated fund products should be read in conjunction with the information contained in section M - Accounting and Control Matters - 1 - Critical Accounting Policies and Estimates in our 2018 annual MD&A. Additional information on market risk can be found in Note 6 of our 2018 Annual Consolidated Financial Statements and the Risk Factors section in the AIF.

I. Additional Financial Disclosure

1. Revenue

Revenue in the first quarter of 2019 was $11.4 billion, up $5.4 billion compared to the first quarter of 2018. The increase was mainly attributable to increases in the fair value of FVTPL assets largely due to lower interest rate yields, partially offset by lower net premium revenue. The impact of foreign exchange increased revenue by $213 million.

Adjusted revenue of $7.2 billion in the first quarter of 2019, decreased $0.5 billion compared to the first quarter of 2018. The decrease was primarily due to lower net premium revenue in SLF Canada, and lower fee income from SLF Asset Management.

2.  Changes in the Statements of Financial Position and in Shareholders' Equity
Total general fund assets were $172.3 billion as at March 31, 2019, compared to $168.8 billion as at December 31, 2018, primarily a result of a $4.2 billion increase from the change in value of FVTPL assets and liabilities and an increase of $1.0 billion from business activities, partially offset by a decrease of $1.6 billion from the strengthening of the Canadian dollar relative to exchange rates at the end of the fourth quarter of 2018.

Insurance contract liabilities (excluding other policy liabilities and assets) of $118.6 billion as at March 31, 2019 increased by $3.7 billion compared to December 31, 2018, mainly due to changes in balances on in-force policies (which include fair value changes on FVTPL assets supporting insurance contract liabilities) and balances arising from new policies partially offset by the impact of foreign exchange.

Shareholders' equity, including preferred share capital, was $23.8 billion as at March 31, 2019, compared to $23.7 billion as at December 31, 2018. The increase in shareholders' equity was primarily due to:

As at April 26, 2019, SLF Inc. had 593,523,395 common shares, 3,554,832 options to acquire SLF Inc. common shares, and 92,200,000 Class A Shares outstanding.

3.  Cash Flows