Q1 2022 Sun Life Financial Inc Earnings Call

May 12, 2022

Good morning, everyone.

My name is Latif and I will be your conference operator today.

At this time I would like to welcome everyone to the Sun Life Financial Q1, 2022 financial results Conference call.

All lines have been placed on mute to prevent any background noise.

The speaker's remarks, there will be a question and answer session.

The host of this call is you need.

<unk> President head of Investor Relations and capital markets. Please go ahead Mr. Benson.

Thank you.

And good morning, everyone welcome to Sun Life's earnings call for the first quarter of 2022, our earnings release and the slides for today's call are available on the Investor Relations section of our website at Sun life Dot com.

We will begin today's call with an overview of our first quarter strategic highlights from Kevin strain, President and Chief Executive Officer.

Following Kevin's remarks management, seeing 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. This morning.

Turning to slide two I draw your attention to the cautionary language regarding the use of forward looking statements and non <unk> financial measures, which form part of today's remarks.

As noted in the slides forward looking statements may be rendered inaccurate by subsequent events and with that I'll now turn things over to Kevin.

Thanks, Steve and good morning to everybody on the call today, turning to slide four sunlight delivered a solid start to 2022, driven by our diversified business model prudent risk management practices and strong capital position.

Reported net income of 880 $858 million was down 8% from prior year and underlying net income of $843 million was broadly in line with last year.

COVID-19 continued to impact our businesses and while headwinds from Covid remain as of March we started to see an improvement in U S. Covid related deaths, which should drive more favorable mortality experience in the second quarter we.

We continue to watch the trends closely and in most of our markets. We are seeing a transition as COVID-19 becomes less of an impact and populations have increased immunity. This doesn't mean colgate is over but it does suggest smaller impacts in terms of claims and business interruption going forward. We're also pleased that in both of our markets. Our offices are now open.

And we have people working flexibly, both in the office and virtually as their day allows.

With the war in Ukraine impacting economic conditions supply chains and energy costs. The world is now facing new challenges with heightened geopolitical pressures and central banks raising rates to curb higher than expected inflation. These challenges create uncertainty, but our diversified business mix and strong risk management will enable us to match.

<unk> through these headwinds, we're expecting pressure on equity markets credit and expenses due to inflation, but higher interest rates, particularly at the long end of the curve should help drive profitability and the ongoing growth in our businesses also supports our medium term objectives, our capital position remains strong with a light cat ratio of 143.

Percent at SLS. We are also pleased to announce a four 5% increase to our common share dividend demonstrating our commitment to deliver value for our shareholders turning to slide five we continued to deliver on our purpose and our ambition in the quarter as we saw continued progress in delivering on our client impact strategy.

Sustainability is a key component of our strategy and in March we released our annual sustainability report, which outlines the areas where sun life can have the greatest impact, including increasing financial security fostering healthier lives and advancing sustainable investing the report outlines how being sustainability driven is core to sunlight strategy.

And how we're making an impact on sustainability for our clients our employees and advisers are communities and future generations in.

In Hong Kong, we announced stellar the first ESG savings plan in the market that actively integrates ESG concepts into its investment strategies. This enables clients to build their wealth in a way that it has a positive impact while also ensuring a legacy for future generations.

Stellar allocates funds to sustainable investments, such as renewable energy sustainable buildings energy transition and water and waste management with a particular focus on assets with relatively low carbon intensity.

This is a great example of bringing a sustainable solution to market by leveraging the strength of SLC management and our affiliated companies implement capital partners and Bento Green Oak as well as our local investments team in Hong Kong.

Moving to distribution excellence last month, we announced the expansion of our partnership with <unk> in Indonesia.

<unk> is an important regional partner for us in Asia. In fact, <unk> was one of our first ever Bancassurance partners.

Under the new agreement satellite will be the provider of insurance solutions to <unk> customers through all channels starting in 2025.

We are excited about expanding our relationship with <unk> in Indonesia, Indonesia is the largest economy in southeast Asia with a young emerging middle class one of the world's largest working age populations and low insurance penetration.

Turning to asset management, we continued to see strong momentum at SLC management. We are in the first quarter, we raised $5 7 billion of capital, reflecting the strength and diversification of our alternative investment capabilities.

Sunlight also recognized for Sun life was also recognized for its inclusive culture last month. When it was named one of the 2022 best workplaces in Canada by Great place to work I'm proud of this achievement and I want to thank our employees for making this possible.

We're also excited that starting next season sunlight will be the official health and wellness partner of the Toronto Raptors basketball team as part of this expanded partnership our goal together is to find new opportunities to help Canadians live healthier lives.

Slide five and six also provide updates on how we continue to drive digital leadership across the organization.

In Canada, we launched we launched prosper by sunlight delivering a simple and intuitive client experience prosper by sunlight is a first of its kind hybrid advice solution that provides all Canadians a digital tool to identify track and reach their protection wealth and health goals all in one place.

Prosper is linked to a team of salaried advisers, who can provide recommendations and product solutions to our clients at moments that matter in.

In the U S. We introduced benefits explore.

We know benefit selection can be stressful and confusing for some members. So this tool helps educate and prepare employees for benefits enrollment. The tool provides access to life benefits counselors and direct links to their employers online enrollment and offers employees are guided path to learn about their benefits through the year through the year. So they can choose the.

<unk> benefits package for their needs.

And in Asia, our predictive modeling tool next best offer helps our advisors recommend the right products at the right moment to our clients.

We've seen terrific results with over 70% product take up from the clients, we were able to engage with through this tool.

These are just a few examples of how sunlight digital leadership is delivered on our client impact strategy, while also generating business growth.

I also want to provide a quick update on our agreement to acquire Dent to quest, we have made good progress obtaining necessary approvals and remain on track for close in the first half of the year. We're looking forward to identify regarding becoming part of the sunlight family and welcoming their employees and 33 million members to sunlight.

Before I hand, the call over to manage it I want to say, our hearts and thoughts remain with the people of Ukraine and everyone affected by the senseless invasion and war.

Together with the global community, we're concerned about the ongoing humanitarian crisis in the country and surrounding regions and the threats the global peace and security.

Sunlight, its companies and affiliates, including dental Green Oak and infrared partners, along with our employees have donated more than $1 $1 million to various charities that are providing direct humanitarian support in Ukraine.

We also know that people are struggling with mental health concerns, which have been exasperated by both the ongoing pandemic as well as concerns related to world security and peace as.

As a result in partnership with dialog. We are currently providing free access to self guided online therapy to anyone in Canada struggling with mental health issues.

All of this continues to drive home how important our purpose is and I can't remember a time when helping people achieve lifetime financial security and live healthier lives has been more important.

And our mix of asset management insurance businesses are well positioned to deliver on this purpose, but also to manage through these economic headwinds with that management will now take us through the financial results for the first quarter.

Thank you, Kevin and good morning, everyone.

Slide eight provides an overview of our first quarter results.

Sunlight delivered solid results amidst a challenging operating environment with good momentum across all of our business groups.

Reported net income in the quarter was $858 million down, 8%, reflecting less favorable market related impacts.

Underlying net income of $843 million and underlying earnings per share of $1 44 were down modestly from the prior year.

Earnings for the quarter were supported by strong fundamental business activity, partially offset by corporate related impacts in the U S and Asia.

Earnings on surplus of $65 million was lower this quarter, primarily driven by higher external debt costs and lower FX gains.

With rising rates and wider spreads contribution from FX gains are expected to moderate at the same time. These factors can also provide trading opportunities, which can generate investment related gains.

Underlying return on equity was 14% in the quarter.

Assets under management were 135 trillion at the end of Q1.

This was down from the end of last quarter, reflecting declines in equity markets and rising interest rates.

Book value per share was up 7% over the prior year.

Excluding impacts in other comprehensive income, which includes foreign currency translation and changes in the available for sale book value per share was up 11%.

Our capital position remains strong with Leichhardt races of 143% at <unk> and 123% at SLA and a financial leverage ratio of 25, 9%.

Let's turn to our business group performance, starting on slide 10 with MFS.

And then fast reported net income of <unk> $228 million, which is up 23% from the prior year, reflecting lower fair value changes on share based payment awards.

Underlying net income was up 4% driven by higher average net assets in MFS generated a solid pre tax net operating margin of 39%.

Compared to the fourth quarter of 2021, the operating margin declined by four percentage points due to lower obviously on assets and seasonally higher compensation expense.

AUM declined 8% during the quarter to six to use 637 billion largely reflecting the decline in equity markets and U S $5 4 billion up fund outflows.

MFS continues to deliver strong long term fund performance for our clients.

And the annual Barron's ranking released in February MFS ranked in the top 10 for the five and 10 year periods across its U S Fund lineup.

Turning to slide 11, SLC management delivered another strong quarter with reported net income of $19 million and underlying net income of $34 million.

We have provided some additional financial metrics SLC management that align with alternative asset management peers.

One of the key metrics as fee related earnings, which represents a profitability for managing the assets it for items such as realized performance fees.

Fee related earnings were up 38% year over year, reflecting strong capital raising activity and deployment into fee, earning AUM over the past 12 months.

The fee related earnings margin of 23% was down modestly due to higher marketing costs for capital raising activities.

Operating margin of 24% was up slightly and is on track to meet our target of 30% to 35% by 2025.

Strong capital raising of $5 7 billion in the quarter reflects the strength and diversification of our investment platform.

And we are currently holding 18 billion in AUM, not yet earning fees. Once invested these assets can generate annualized fee revenue of more than $150 million.

On Slide 12, Canada as reported net income of $263 million was down 35% year over year, mainly due to market related impacts.

Underlying net income of $298 million was up 5% from the prior year underpinned by broad base business growth and higher investment gains.

Momentum in the Canadian business is strong.

Expected expected profit growth was 7% total while sales were solid reflecting higher defined contribution sales and insurance sales were strong driven by new group benefits mandates and higher non par life sales.

We're also continuing to invest in capabilities and make it easier for clients to do business with us.

One example is our investment in predictive analytics and our underwriting process.

This has allowed us to process over 60% of life policies without lab testing further improving our overall client experience.

Turning to slide 13 U S reported net income of U S $133 million was down 20% from the prior year, reflecting a decline in underlying net income.

Underlying net income for the first quarter of U S $93 million includes $30 million of Covid related impacts, mostly driven by elevated mortality.

Compared to the prior quarter earnings were up $37 million driven by favorable stop loss mobility, and a 17% decline in working age population deaths.

<unk> offset by higher long term disability claims.

Looking forward, we expect pandemic related mortality headwinds to moderate as USS have continued to decline since early March.

Notably, we expect there will be some normalization of favorable stop loss morbidity experience as health care utilization starts to increase.

More importantly, the core fundamentals of our U S business remained strong as we continue to generate high persistency, good premium growth and achieved solid pricing margins, all while making investments in our product and digital capabilities.

Slide 14 outlines Asia results for the quarter.

Reported net income was $161 million down 16% from the prior year in constant currency, reflecting market related impacts.

Underlying net income of $152 million was down 1% on a constant currency basis.

The first quarter results included lower sales in Hong Kong, driven by heightened COVID-19 related lockdown measures.

Mortality experience was elevated in international driven by a small number of larger claims.

These factors were partially offset by higher investment activity gains and disciplined expense management.

Excluding Hong Kong insurance sales were relatively consistent with prior year, which highlights the benefits of our diversified markets and products across Asia.

Whilst net flows of nearly $300 million reflect the strength in the Hong Kong NPL market, where we continue to ranked second overall for net flows.

Looking forward as Covid restrictions are slowly lifted in our Asian markets. We are optimistic the sales activity will pick up.

Altogether, our businesses delivered solid financial results against a challenging macroeconomic backdrop.

Although we expect headwinds to continue over the near term, we believe our diversified business model along with our strong capital position provide a resilient foundation to manage through the current environment.

We will also maintain our focus on executing on key strategic priorities and we will continue to invest in our businesses for future growth.

Before I close off I want to remind everyone about our <unk> 17 education session on May 31.

Overall Sun life is well prepared for the transition to <unk> and we look forward to sharing more information with you at the end of the month.

With that I'll turn the call back to you need for Q&A.

Thank you management to.

To help ensure that all of our participants have an opportunity to ask questions. This morning, I would ask you to limit yourselves to one or two questions and then re queue with any additional questions I will now ask our operator to poll the participants.

Thank you as a reminder to ask a question you will need to press star one on your telephone to withdraw your question press the pound key.

Please standby, while we compile the Q&A roster.

Our first question comes from <unk> <unk> of Scotiabank. Your line is open.

Hi, Dan.

Just wanted a little bit more detail on your outlook for.

Mortality in the U S.

It was noted that it is improving when do you expect it to actually normalize.

And if we look at the stop loss business as well when do you expect the COVID-19 related impacts to fully normalize there as well.

Good morning, many it's Dan fishbein, thanks for the questions.

In terms of.

The mortality.

We're certainly seeing significant improvement as you saw the first quarter was better sequentially than the fourth quarter most of that improvement occurred in the month of March.

So if you break it down by the months, we're starting to see steady improvement month over month I can share that April .

Fruit from there and so far in May we see further improvement if you look at external estimates.

We're about 160000 total deaths in the U S. In the first quarter and the external estimates are predicting an average of about 30000 total population deaths.

In the second quarter. So that's a reduction of about 80%. So you should expect to see significant improvement in <unk>.

Mortality certainly reflecting that.

For your question as to when will it completely returned to normal.

Unfortunately, we don't think that Covid is going away completely.

And we do think there will be elevated mortality for <unk>.

<unk> period of time.

So we are building that into our pricing as we've mentioned before.

It does take a full three years to cycle through the entire book of business, we started increasing our pricing at the end of last year.

Certainly we have a ways to go until that pricing.

Catches up but thats, probably about mid single digits.

Impact.

Our hope of course is that debt will remain at the current relatively low level.

We're likely to see some peaks and valleys in that going forward.

At 325 deaths a day at the moment on a seven day average in the U S and that compares with numbers in the first quarter that reached as high as 2700, a day. So clearly mortality is at a lower level now.

Stop loss as you noted we had quite favorable experience in the first quarter.

About half of that was due to tailwind related to COVID-19 delays in care.

Half of that was related to underlying favorable underwriting results.

We do think over the next few quarters utilization in hospitals will return close to normal levels, but that will take a few quarters already.

One underlying good results, though should persist.

Thanks for that and then just maybe just a follow up on the pricing I know, we've talked about it last quarter, but just.

From a competitive point of view.

What are you seeing out there in the market as are most of your competitors.

Viewing it the same way as you in terms of the necessity to raise pricing corporate is not going away or is there.

Basically what's going on in the market now relative to the pricing that you're pushing through.

Yes, generally our sense is that that mid single digit range is what the industry is doing.

There's always exceptions it remains a highly competitive market and so on a case by case basis, we still see pretty intense competition.

But we believe that our level of increases consistent with the market.

Thank you.

Sure.

Thank you. Our next question comes from David <unk> of EB.

Evercore ISI your line is open.

Thanks, Good morning.

Just had a question for MFS.

So.

Kevin could you just talk about the margin outlook there.

And how you think you can you can manage through the market volatility given some of the inflationary comments you made.

In your prepared remarks that may make it more difficult to manage the expense base than in the past.

So thanks, David I'm going to let Mike answer the question.

On that.

Hey, good morning, David.

I mean, clearly the as we.

We made our way through Q1 year over year results were pre tax was up over last year, but as <unk> has continued to come down in the second quarter relative to last year, that's going to obviously have an impact on the profitability and the margin guidance.

The guidance, we provided over time as in a normal environment. We think a net margin of 35 to 40 range. We were at the higher end of that.

And well over that it late last year, given the market at all time highs and so what youll see in the expense side, what naturally comes down as those variables.

Those things that are tied to profitability like compensation asset based fees that we pay distributors and so we're still comfortable with that range, but you should expect that.

If the market stays where it is for the year, obviously the margins could be pressured relative to last year.

Yep got it that makes sense.

And then maybe just another question just for Dan.

Just in terms of.

The non Covid hit long term disability experience could you just talk about what youre seeing.

What you saw in the quarter or your expectations and if you are repricing the business or how you are repricing the business in response to that.

Yes, we definitely are seeing some elevated morbidity in long term disability.

Significant amount of that is COVID-19 related there is some we do have some long COVID-19 cases. The good news is although this is a little more anecdotal we are seeing recoveries in long COVID-19. So those disabilities don't seem to be long term persistent but there is some overall elevation.

In LTE experience, that's non COVID-19 related as well, it's modest but it's real we think that's related to some of the second order effects of the pandemic, including the recent moves by some employers do require employees to return to the office.

We think some of that will persist, but may be not long term that may be a few quarters kind of impact.

As the labor market and employers find their equilibrium of how they want to work in the future.

However, like in our group life business, we are raising prices in our disability business as well to reflect these impacts coincidentally.

Coincidentally, it's the same mid single digits kind of range and we're generally seeing that in the marketplace as well so you've seen the fact, though you see case by case intense competition, but we do believe competitors are raising rates by a similar amount.

Got it thanks for that color.

Okay.

Thank you. Our next question comes from Gabriel the shame of National Bank. Your line is open.

Good morning.

Yield enhancement gains big pickup.

This quarter from what we've seen in the prior few quarters.

Over $100 million.

Tony.

That number would look like.

2017.

Okay Briolette managers good morning.

As you know the overall investment activity gains are largely driven by a couple of things the overall market conditions and our available funds that we have to put it into into the market to invest.

And obviously, we had some pretty good conditions in the quarter and our investment teams took advantage of that to invest in good quality higher yielding assets and thats what drove the gain in the quarter on the <unk> 17 question, we'll handle that on our may 31st session that we have upcoming.

So we'll give you more details then.

Would it be materially lower.

I guess that would Gabriel will give you more details on May 31.

And I guess this quarter I mean, the current accounting this quarter youre, probably seeing similar spread pickup opportunities alright.

Yes.

It will depend on sort of the market availability as well as the funds that we're putting into the market. So so far the market is.

As continuing to provide some opportunities.

Okay. Thanks.

Thank you. Our next question comes from Scott Chan of Canaccord. Your line is open.

Good morning.

Steve I'll ask and I'll see you really appreciate it.

Increased.

The updated disclosure on that.

So specifically.

First is kind of the net income target that you updated last quarter.

Maybe maybe going down to the margin.

Doing FRE target.

But margins were in the low <unk>.

<unk> talked about it.

5% operating target by 2025.

Would it be safe to assume that operating margin would be in line with that operating target or would there be nuances up or down.

Thanks, Scott. This is Steve I can answer that I think over time, you're going to see the main difference between FRE.

Fee related earnings and operating income is going to be that under between those two you're going to have performance fees and income from seed investments that will be the difference between operating income and FRE margin.

I think that those over time youre going to see more performance fees.

As the business grows I think youre going to see more seed capital investments so you'll see more.

C related income.

I think with our.

Margin for the quarter were on track, we think for the margin parts that.

We set out for two.

2025, and some of the fluctuation youll see in margin quarter to quarter or even year over year can relate to things like catch up fees, which can impact the margin or marketing costs, we have a big fundraising in your expense marketing costs in a given quarter, but you havent earned the revenue yet because that will play out over time as the monies invested so you are going to see a bit of fluctuating.

<unk> in that but we do think we're on target for our on track for our targets.

Great and what have you.

We're all seeing what's happening in the public markets private markets are you all platform can you maybe describe them.

Market headwinds that you're seeing or perhaps tailwind.

Chairman.

I think it's a bit too early to see what the long term impact is on either the underlying portfolios and our different asset classes are on the fundraising I would say the first quarter fundraising we feel really good about.

We haven't really seen examples of investors pulling back from these asset classes, yet if market volatility picks up you could see that we haven't seen it yet I think the market environment actually can cut both ways.

With with rates going up and spreads going up that could have an impact on asset classes like real estate.

So I would say our real estate portfolios were up strongly during the first quarter.

But on the on the flip side with raising with rising rates, we've actually seen money coming back into our fixed income portfolios as pension funds. This is actually helps the funding funding ratio for pension funds and in some cases they are more willing to now put more money back into fixed income at higher yields so little too early to see what the longer term impacts are but I think it cuts cuts.

Couple of different ways.

Okay. Thank you very much.

Okay.

Thank you. Our next question comes from Paul Holden of.

<unk> your question please.

Thank you good morning, so going back to the U S group and the conversation around the normalization of experience and perhaps mortality staying.

Higher for longer is there anything in your mind that's changed your <unk>.

Profit margin expectation, excluding the dent the quest acquisition.

Good morning, Paul It's Dan Fishbein again, it really is obviously.

The fact that we may see somewhat elevated more <unk>, although certainly nowhere near what we've been seeing over the past couple of years.

In the short term could affirm.

Margins, but as we reprice for that and we should be able to reprice for that.

And that would put us back at the same margins.

As I mentioned in last call overall, our group benefits business is in the best condition that its ever been.

<unk> strong persistency has improved.

We're getting the pricing that we ask for that we need.

<unk> had significant gains and expense efficiencies introduced new.

Products capabilities and digital programs into the marketplace all of those things position us very well in the previous margin guidance that we've given of 7% or greater is still very much our expectation.

Absent COVID-19 effects, but the fundamentals of the business remain strong and remain as they were.

Great. Thank you and then a capital allocation question for Kevin You noted the capital strength of the business, which is.

Obviously, we're seeing valuations drop is this leading to increased potential capital deployment ops.

Option.

Would you be willing to be opportunistic in this type of.

Environment with capital deployment.

Well thanks Paul.

As you know and we've talked about in other quarters, our priorities for capital deployment remain largely the same rate we're focused on supporting our organic growth in our organic growth target for EPS is 8% to 10% and continue on that we're committed to supporting our dividend and the dividend growth and we've outlined.

The 40% to 50% of underlying earnings and you saw the four 5% increase in our dividend this quarter of course, we've been able to deploy.

Into M&A that improves either scale or adding new capabilities like the <unk>, that's going to be closing soon and that's going to use a big chunk of capital, but we're always looking forward at what the opportunities are across the three of those and we always keep buybacks is.

As an alternative if we if we see that the level of capital is is more than what we need we give it back to shareholders. So at this point in time, it's a combination of economic conditions uses we have for capital and we continue to look at all of the users.

Okay. That's great. Thank you.

Thank you. Our next question comes from Doug Young of data out there.

<unk> capital markets.

Your line is open.

Hi, Good morning, I guess this question's for shock I think group morbidity experience in Canada.

Was adverse once again.

And I think that's been a recurring theme for a while here and I know that you are taking actions putting through price increases just wanted to get a better sense of what youre seeing on the ground.

And at what level of price increases are flowing through and when we might see that turn.

Yes, Doug. Thank you further question.

Youre right on the morbidity experience.

Unfavorable in the quarter.

GB disability as you say.

I might just remind you that.

You've got two things we're looking at one is the volume of cases, which we called the answer that and then how long.

The duration of that case before people get back to work.

In May 2019, we decided to increase our pricing quite materially.

That was to do with the fact that when it comes to answer them.

Our view and our models are suggesting that the trend.

Yeah.

What I would call durable trends.

And so we took action.

And today I can tell you Doug.

Yes. It is in line with our pricing and our expectations with the issue is indeed as you pointed out.

On the duration.

Unlike answer on duration.

Don't see this for now I think durable trend.

It's taking part of this is cole had access to care has been an issue people getting surgeries and so on.

So our view remains that this is temporary.

Of course.

All were to change and suggest that.

That has a more durable pattern.

We would take action.

This stage.

We think thats not the case.

Okay.

And then just a question on the Asia business.

There is a large India state or an insurance company in India going public.

Which is interesting and topical I'm just curious what if any of this has impact wise on your viewpoint in India or Europe , India life insurance business.

Yes, I can start and then <unk> also it's Kevin in goods also on the call. So I can let her add some some color yes.

<unk>.

We're well aware of is going public the LLC as the largest provider of insurance in the country. It's an amalgamation and 1956 to 1957 evolve the insurance companies.

I think being a public company provides a level of discipline and transparency, which is probably long term good for the industry, we really like our partnership with <unk> group.

We have a strong position in both the insurance company in the asset management company.

I think that that doesn't change from the LSE going going public at all they were already a big competitor.

And so it's.

We're still.

We're still optimistic about India, and we think there's great potential there I don't know if <unk>. If you wanted to add anything.

No other than you would've seen we still had a relatively strong sales in the quarter.

Let's talk about the business north of the digitalization, that's taking place.

We are well positioned.

In asset management.

That's it for me, we can see that the valuations in India are quite high.

And I would see you would note that the the P/e multiples are high and that shows you I think the long term value creation opportunity.

In India.

Yes.

Thanks.

Thank you. Our next question comes from Mario Mendonca TD.

<unk> Your line is open.

Good morning, I think you go back to <unk>.

Policyholder expenses, our policyholder experience I noticed that expense experience was positive this quarter.

I kind of look back at the model to see like the last time that was true and I think I have to go back to Q3 2019. So can you talk a little bit about why it would've flipped signed this quarter and then on a related note. The other expenses are the other experience was.

Rather negative I'm, referring to the minus $41 million is that expense I mean should we be looking at those two together is what I'm getting at.

Good morning, Mario it's manage it so on the first item the sort of credit as you see in expenses. This quarter is largely due to some compensation adjustments that happen as part of the year end process.

So that's why there was a true up for that so that drove that was a recovery in the quarter. So that's what you saw.

On the other other expenses that you mentioned, we do have some investments that we make in our businesses overtime that that are reflected in that line in one of those investments. Obviously, that's happening right now is higher for 2017, so along with some smaller investments, we're making the BG groups. So that's what's in that line.

Now.

I appreciate that Youre doing your.

Your update <unk> update in 2000, sorry later on this month.

But given the market interest in that.

There anything you can offer in terms of what the transition could mean to the company.

Value today.

Again, I think in America.

Are you sort of say there is.

There are different components of that so I don't think it would really be helped.

Helpful to give you a short answer to that I think we want to take the time to walk you through the various elements of that and how they come together on May 31.

Thank you.

Thank you. Our next question comes from Tom Mackinnon with BMO capital. Your line is open.

Yes. Good morning, Thanks for taking the question.

Just with respect to.

And unexpected dividend increase it kind of just shows there is some.

Recently, good capital generation here I don't think we've heard anything about.

Kind of excess capital generation.

Since you gave us an 800 million annual figure several years ago. So is there anything you can share with us with respect to excess capital generation.

At Sun Life, and then I have a follow up.

Sure Good morning, Tom its management I'll take that so as you know we've maintained a strong capital position for many years and Thats really underpinned by our disciplined approach to capital management and as you say an important component of that disciplined approach is generating strong capital from our diversified portfolio of businesses and as <unk>.

Kevin outlined we do have a very clear and consistent approach to how we manage our capital we first invest in organic growth of our businesses and that consumes about 25% to 35% of our overall capital generated from underlying net income.

Next we focus on growing our dividend and as we've talked about our payout range is 40% to 50% of underlying income.

And so that leaves about 25% to 35% of underlying net income for excess capital generation to deploy before the impacts of market related items.

And if you were to take a look at that for the past year that would have been about $1 billion before those market related items, so a bit higher than the 800, we saw earlier.

That's great.

Just with respect to some of the discussions with Merck.

Morbidity.

Is it is the thing that we should be looking at here more.

Just confirming that it might be more short term related.

Is and more COVID-19 related should focus be more on unemployment.

There is some sometimes anti selection and group morbidity so as long as we stay with relatively good.

Employment levels would you expect to group morbidity just the modest uptick that we saw in the quarter too.

Come back in as a result of.

Unemployment being fairly.

Fairly muted here.

Tom I think we can let Dan answer that first for the U S and <unk> cancers second for Canada.

Okay.

Sure.

Yes.

As you know unemployment is almost at a historically low level. In fact, there is $11 5 million open jobs in the U S. Right now so we don't think unemployment is really a factor here.

Yeah.

We think there are other second order effects.

As I mentioned, including employers.

Firing people to come back into the office, who might not be fully comfortable doing that.

Likely a transient effect the marketplace will find its equilibrium is labor and employers decide how they want to work together in the future. So we don't see that as necessarily.

Persistent impact.

And Tom This is Jack similar to that I would say we do.

Don't see that level being a material issue at the moment, what we're seeing.

It's really about durations as I said earlier.

Yes, I didn't mention it earlier, but the mental health cases.

Yes, a bit longer.

Other cases.

So.

With the access to care, it's really an issue of how quickly we can get people back to work.

And at the moment I would say, we don't expect that to be a durable trend.

We're watching it very closely.

Obviously, an impact on our results.

Okay, if I could just squeeze one more as an impairment in the quarter. If theres any kind of color you can shed with respect to that.

How we should be thinking about credit going forward.

Tom This is Randy Bryan I'll take that yes.

Yes, the impairments for a couple of credits within our private fixed income portfolio.

We're entirely idiosyncratic in nature, and so not indicative of any trend either within <unk>, specifically or in the overall portfolio I.

I think overall youll see another positive credit released this quarter.

Albeit down from prior quarters, I'm very comfortable with the composition of the portfolio.

So so we have to see how markets play out as we look forward.

Okay. Thanks.

Thank you. Our next question comes from Lamar Prasad of core Mark Your line is open.

Thanks, My question, probably more for magic Formula ground I.

I guess the outlook for earnings on surplus and that kind of.

$100 million range I understand it's a rough target it may bounce around from quarter to quarter, but just looking at that.

That target in the context of what we've seen over the past two quarters some of the challenges associated with generating a FX gains in seed investment gains.

Playing out in the market and rate environment.

Yeah like that $100 million Mark.

Is achievable in this market backdrop I guess.

Can I ask you that you have to really go back over a decade defined it two quarters growing up.

Earnings on surplus this week any comments would be helpful.

Sure. Good morning, Martin management, So as we mentioned in our earnings and surplus has kind of been in the $100 million range and this quarter, we saw a $65 million and there were a couple of items that led to the lower result, as we had lower mark to market seed investment.

Losses.

And that really reflects a wider credit spreads youre seeing there was some timing items in our investment income. We also had some higher debt costs, reflecting the higher flow rates on floating rate debt as well as the debt that we issued to fund into question as you mentioned, a lower FX gain so altogether, that's what drove that number and given the current environment that we're.

And as I mentioned in my prepared remarks, we would expect the FX gains to be more muted, which would result in a surplus number below the $100 million range that we've been seeing previously but the other thing that I mentioned, obviously is also there's other components.

That also have different impacts from those market related items, and we talked about it earlier in this call that that could also provide some opportunities on the investment activity gain side.

Okay. Thanks, and then if I can squeeze another one maybe just circling back.

In earlier question around capital allocation for Kevin This is Matt.

You have the capacity to integrate that the class as well.

Testing another acquisition.

With M&A kind of be off the table for a period of time.

It's a great question. Thanks.

<unk> is the second largest acquisition we've ever made.

But it's got a great management team then is team have executed on a large acquisition and if you remember, it's really bringing a larger dental business into a smaller dental business alongside of ours, and so were pretty confident that that integration is going to go well amended actually mentioned we've got that.

The debt costs running through our our earnings right now, but we don't have the benefit of the earnings coming through so that's one thing that we're looking forward to but from the overall capital position. It's obviously going to use a big chunk of the $4 7 billion. We have at the Holdco. We obviously see that we are in stress times right now and if you look at the.

The economic conditions.

But we are we do have a solid capital position and we continue to assess what the what the opportunities are so.

It's.

It is it is a use of the.

The majority of the capital at the Holdco when the deal closes, but we continue to have an eye on things that will improve the business but.

Sure.

That financial discipline will not change and I think part of the financial discipline is looking at the economic conditions and what you are purchasing.

Great. Thanks.

Thank you. Our next question comes from Nigel D'souza of Veritas investment Research your question. Please.

Thank you good morning, I had a follow up for you first on SLC I believe you mentioned $150 million and analysts annualized fee revenue.

Can be generated from AUM not yet invested I was wondering if you had a period over which you expect to realize that and.

Op margin do you expect to earn on that revenue.

Okay.

Hi, Nigel Thanks for the question.

When we raise.

Money across our platform the expected investment periods can vary, but I would say, we would expect to get that money invested over 12.

12 months to 24 months generally.

And some in some funds the investment period can be three years. So.

That can be the case, but I would say if it goes into the third year in a given fund you've invested most of the assets by that by.

That time.

The type of funds that lead to lead to these non fee, earning assets are generally higher fee.

Asset classes. So it's real estate, it's alternative credit its infrastructure, where you raise money in a fund and then you draw it down and as you draw it down and invest money, you're starting to fees as I said those are higher fee assets.

Compared to give out a specific margin on that but I would say that.

Across our platform those would be the higher fee assets that we manage and therefore.

There are semi.

Additional cost to go with those assets, but those would generally be our higher margin assets as well.

Okay. So I think it's fair to assume it's probably above 20%.

Based on what you disclosed on your on your fee related earnings margin.

And then the next question I had was on your.

Impact of investment activity its favorable experience this quarter.

And I was wondering if you could provide some color is that mainly yield enhancement and how sustainable do you think.

This quarter's run rate is given the yield environment that we're seeing today.

Hi, Nigel it's Randy Bryan I'll take that.

Some of what you heard in prior quarters is that we had built some dry powder coming.

Coming into this period with the expectation for the observation that credit spreads were near all time adjusted lows where rates were at all time lows equities were at all time highs. So we took some risk off the table and built dry powder some of that dry powder was deployed this quarter. Some of that this past quarter some of that dry powder will be.

Deployed as we see opportunities in Q2 and forward and we are seeing opportunities with the dislocations in the market and so that was that was a nice piece of it. Another pieces mentioned mentioned was the strong PFA origination originations in spreads.

And we are seeing that continue.

In Q2 to.

As a matter of.

Deployment on the balance sheet in terms of how they flow, but we are seeing strong.

<unk> strong spreads there as well.

Okay. That's helpful and the last question I have for you and apologies if you already answered it.

On the IRS 17 update later this month did you mentioned that you would be providing an update on the <unk>.

Expected impact underlying earnings or is that still further out.

Yes, I think we're going to cover a range of topics, including our outlook for our medium term objectives.

Okay I appreciate it thank you.

Thank you we have no further questions at this time.

We're trying things over to Mr. <unk> for closing remarks.

I would like to thank all of our participants today should you wish to listen to the rebroadcast it will be available on our website. Later. This afternoon. Thank you and have a good day.

This concludes today's call. Thank you for your participation you may now disconnect.

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Good morning, everyone. My name is Latif and I will be your conference operator today.

At this time I would like to welcome everyone to the Sun Life Financial Q1, 2022 financial results Conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session.

The host of this call is you need Vincent Vice.

<unk> head of Investor Relations and capital markets.

Please go ahead Mr Benson.

Thank you.

Good morning, everyone.

Welcome to Sun Life's earnings call for the first quarter of 2022.

Our earnings release and the slides for today's call are available on the Investor Relations section of our website at Sun life Dot com.

We will begin today's call with an overview of our first quarter strategic highlights from Kevin strain, President and Chief Executive Officer.

Following Kevin's remarks management, seeing 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.

Other members of management will also be available to answer your questions. This morning.

Turning to slide two I draw your attention to the cautionary language regarding the use of forward looking statements and non <unk> financial measures, which form part of today's remarks.

As noted in the slides forward looking statements may be rendered inaccurate by subsequent events and with that I'll now turn things over to Kevin.

Reported net income of 880 $858 million was down 8% from prior year and underlying net income of $843 million was broadly in line with last year.

COVID-19 continues to impact our businesses and while headwinds from Covid remain as of March we started to see an improvement in U S. Covid related deaths, which should drive more favorable mortality experience in the second quarter.

We continue to watch the trends closely and in most of our markets. We are seeing a transition as COVID-19 becomes less of an impact and populations have increased immunity. This doesn't mean colgate is over but it does suggest smaller impacts in terms of claims and business interruption going forward. We are also pleased that in both of our markets. Our offices are now open.

And we have people working flexibly, both in the office and virtually as their day allows.

With the war in Ukraine impacting economic conditions supply chains and energy cost. The world is now facing new challenges with heightened geopolitical pressures and central banks raising rates to curb higher than expected inflation. These challenges create uncertainty, but our diversified business mix and strong risk management will enable us to <unk>.

Manage through these headwinds, we're expecting pressure on equity markets credit and expenses due to inflation, but higher interest rates, particularly at the long end of the curve should help drive profitability and the ongoing growth in our businesses also supports our medium term objectives, our capital position remains strong with a light cat ratio of 143.

Sustainability is a key component of our strategy and in March we released our annual sustainability report, which outlines the areas where sunlight can have the greatest impact, including increasing financial security fostering healthier lives and advancing sustainable investing the report outlines how being sustainability driven is core to sunlight strategy.

And how we are making an impact on sustainability for our clients our employees and advisers are communities and future generations.

In Hong Kong, we announced stellar the first ESG savings planned in the market that actively integrate ESG concepts into its investment strategies. This enables clients to build their wealth in a way that is has a positive impact while also ensuring a legacy for future generations.

This is a great example of bringing a sustainable solution to market by leveraging the strength of SLC management and our affiliated companies infrared capital partners and Bento Green Oak as well as our local investments team in Hong Kong.

Moving to distribution excellence last month, we announced the expansion of our partnership with <unk> in Indonesia.

<unk> is an important regional partner for us in Asia. In fact, <unk> was one of our first ever Bancassurance partners.

Under the new agreement satellite will be the provider of insurance solutions to <unk> customers through all channels starting in 2025.

We're excited about expanding our relationship with <unk> in Indonesia, Indonesia is the largest economy in southeast Asia with a young emerging middle class one of the world's largest working age populations and low insurance penetration.

Turning to asset management, we continue to see strong momentum at SLC management. We are in the first quarter, we raised $5 7 billion of capital, reflecting the strength and diversification of our alternative investment capabilities.

Slide five and six also provide updates on how we continue to drive digital leadership across the organization.

In Canada, we launched we launched prosper by sunlight, delivering a simple and intuitive client experience.

<unk> by sunlight is a first of its kind hybrid advice solution that provides all Canadians a digital tool to identify track and reached their protection wealth and health goals all in one place.

<unk> is linked to a team of salaried advisers, who can provide recommendations and product solutions to our clients at moments that matter.

In the U S. We introduced benefits explore.

We know benefit selection can be stressful and confusing for some members. So this tool will help educate and prepare employees for benefits enrollment. The tool provides access to life benefits counselors and direct links to their employers online enrollment and offers employees are guided path to learn about their benefits through the year through the year. So they can choose the <unk>.

Rate benefits package for their needs.

And in Asia, our predictive modeling tool next best offer helps our advisors recommend the right products at the right moment to our clients.

We've seen terrific results with over 70% product take up from the clients, we were able to engage with through this tool.

These are just a few examples of how sunlight digital leadership is delivered on our client impact strategy, while also generating business growth.

I also want to provide a quick update on our agreement to acquire Identa Quest, we've made good progress obtaining necessary approvals and remain on track for close in the first half of the year. We're looking forward to identical SP, becoming part of the sunlight family and welcoming their employees and 33 million members to sunlight.

Before I hand, the call over to management I want to say, our hearts and thoughts remain with the people of Ukraine and everyone affected by the senseless invasion and war together with the global community. We're concerned about the ongoing humanitarian crisis in the country and surrounding regions and the threats the global peace and security.

You also know that people are struggling with mental health concerns, which have been exacerbated by both the ongoing pandemic as well as concerns related to world security and peace.

As a result in partnership with dialog. We are currently providing free access to self guided online therapy to anyone in Canada struggling with mental health issues.

All of this continues to drive home how important our purpose is and I can't remember a time when helping people achieve lifetime financial security and live healthier lives has been more important.

And our mix of asset management insurance businesses are well positioned to deliver on this purpose, but also to manage through these economic headwinds with that we'll now take us through the financial results for the first quarter.

Thank you, Kevin and good morning, everyone.

Slide eight provides an overview of our first quarter results sunlight delivered solid results amidst a challenging operating environment with good momentum across all of our business groups.

Reported net income in the quarter was $858 million down, 8%, reflecting less favorable market related impacts.

Underlying net income of $843 million and underlying earnings per share of $1 44 were down modestly from the prior year.

Earnings for the quarter were supported by strong fundamental business activity, partially offset by corporate related impacts in the U S and Asia.

Earnings on surplus of $65 million was lower this quarter, primarily driven by higher external debt costs and lower <unk> gains.

Underlying return on equity was 14% in the quarter.

Assets under management were 135 trillion at the end of Q1.

This was down from the end of last quarter, reflecting declines in equity markets and rising interest rates.

Book value per share was up 7% over the prior year.

Excluding impacts in other comprehensive income, which includes foreign currency translation and changes in the available for sale book value per share was up 11%.

Our capital position remains strong with Leichhardt races of 143% at <unk> and 123% at SLA and a financial leverage ratio of 25, 9%.

Let's turn to our business group performance, starting on slide 10 with MFS.

<unk> reported net income of <unk> $228 million, which was up 23% from the prior year, reflecting lower fair value changes on share based payment awards.

Underlying net income was up 4% driven by higher average net assets in MFS generated a solid pre tax net operating margin of 39%.

Compared to the fourth quarter of 2021, the operating margin declined by four percentage points due to lower obviously on assets and seasonally higher compensation expense.

AUM declined 8% during the quarter to six to use 637 billion largely reflecting the decline in equity markets and U S $5 $4 billion upfront outflows.

MFS continues to deliver strong long term fund performance for our clients.

In the annual Barron's ranking released in February MFS ranked in the top 10 for the five and 10 year periods across its U S Fund lineup.

Turning to slide 11, SLC management delivered another strong quarter with reported net income of $19 million and underlying net income of $34 million.

We have provided some additional financial metrics SLC management that align with alternative asset management peers.

One of the key metrics as fee related earnings, which represents a profitability for managing the assets before items such as realized performance fees.

Fee related earnings were up 38% year over year, reflecting strong capital raising activity and deployment into fee, earning AUM over the past 12 months.

The fee related earnings margin of 23% was down modestly due to higher marketing cost for capital raising activities.

Operating margin of 24% was up slightly and is on track to meet our target of 30% to 35% by 2025.

Strong capital raising of $5 7 billion in the quarter reflects the strength and diversification of our investment platform.

And we are currently holding 18 billion of AUM, not yet earning fees. Once invested these assets can generate annualized fee revenue of more than $150 million.

On Slide 12, Canada as reported net income of $263 million was down 35% year over year, mainly due to market related impacts.

Underlying net income of $298 million was up 5% from the prior year underpinned by broad base business growth and higher investment gains.

Momentum in the Canadian business is strong.

Expected expected.

Profit growth was 7% total while sales were solid reflecting higher defined contribution sales.

In insurance sales were strong driven by new group benefits mandates and higher non par life sales.

We're also continuing to invest in capabilities and make it easier for clients to do business with us.

One example is our investment in predictive analytics and our underwriting process.

This has allowed us to process over 60% of life policies without lab testing further improving our overall client experience.

Turning to slide 13 U S reported net income of use of $133 million was down 20% from the prior year, reflecting a decline in underlying net income.

Underlying net income for the first quarter of USD 93 million includes $30 million of Covid related impacts, mostly driven by elevated mortality.

Compared to the prior quarter earnings were up $37 million driven by favorable stop loss mobility, and a 17% decline in working age population deaths, partially offset by higher long term disability claims.

Looking forward, we expect pandemic related mortality headwinds to moderate as USS have continued to decline since early March.

Similarly, we expect there will be some normalization of favorable stop loss morbidity experience as healthcare utilization starts to increase.

Slide 14 outlines Asia results for the quarter.

Reported net income was $161 million down 16% from the prior year in constant currency, reflecting market related impacts.

Underlying net income of 152 million was down 1% on a constant currency basis.

The first quarter results included lower sales in Hong Kong, driven by heightened COVID-19 related lockdown measures.

Mortality experience was elevated in international driven by a small number of larger claims.

These factors were partially offset by higher investment activity gains and disciplined expense management.

Excluding Hong Kong insurance sales were relatively consistent with prior year, which highlights the benefits of our diversified markets and products across Asia.

Whilst net flows of nearly $300 million reflect the strength in the Hong Kong NPS market, where we continue to ranked second overall for net flows.

Looking forward as Covid restrictions are slowly lifted in our Asian markets. We are optimistic the sales activity will pick up.

Altogether, our businesses delivered solid financial results against the challenging macroeconomic backdrop.

We will also maintain our focus on executing on key strategic priorities and we will continue to invest in our businesses for future growth.

Before I close off I want to remind everyone about our Iff's 17 education session on May 31.

Overall Sun life is well prepared for the transition to <unk> and we look forward to sharing more information with you at the end of the month.

With that I'll turn the call back to you need for Q&A.

Thank you manage it to help ensure that all of our participants have an opportunity to ask questions. This morning, I would ask you to limit yourselves to one or two questions and then re queue with any additional questions I will now ask our operator to poll the participants.

Thank you as a reminder to ask a question you will need to press star one on your telephone.

Draw your question press the pound key please standby, while we compile the Q&A roster.

Our first question.

Comes from <unk> <unk> of Scotiabank. Your line is open.

Hi, Dan.

Just wanted a little bit more detail on your outlook for.

Mortality.

In the U S.

As noted that it is improving when do you expect it to actually normalize.

And if we look at the stop loss business as well when do you expect COVID-19 related impacts to fully normalize there as well.

Good morning, many it's Dan fishbein, thanks for the questions.

In terms of.

Mortality.

We're certainly seeing significant improvement as you saw the first quarter was better sequentially than the fourth quarter most of that improvement occurred in the month of March.

So if you break it down by the months, we're starting to see steady improvement month over month I can share that April <unk>.

Fruit from there and so far in May we see further improvement if you look at external estimates there were about 160000 total deaths in the U S. In the first quarter and the external estimates are predicting an average of about 30000 total population.

Yes.

In the second quarter. So that's a reduction of about 80%. So you should expect to see significant improvement.

In RMR mortality, certainly reflecting that.

For your question as to when will it completely returned to normal.

Unfortunately, we don't think that Covid is going away completely.

And we do think there will be elevated mortality for.

<unk> period of time.

So we are building that into our pricing as we've mentioned before.

It does take a full three years to cycle through the entire book of business, we started increasing our pricing at the end of last year.

Certainly we have a ways to go until that pricing.

Catches up but thats, probably about mid single digits.

Impact.

Our hope of course is that we will remain at the current relatively low level.

We're likely to see some peaks and valleys in that going forward.

Our at 325 deaths a day at the moment on a seven day average in the U S and that compares with numbers in the first quarter that reached as high as 2700, a day. So clearly mortality is at a lower level now.

Stop loss as you noted we added quite favorable experience in the first quarter.

About half of that was due to tailwind related to COVID-19 delays in care, but about half of that was related to underlying favorable underwriting results.

Do think over the next few quarters utilization in hospitals will return close to normal levels, but that will take a few quarters our own underlying good results, though should persist.

Thanks for that and then just maybe just a follow up on the pricing I know, we've talked about it last quarter, but just from a competitive point of view.

What are you seeing out there in the market as are most of your competitors.

Viewing it the same way as you in terms of the necessity to raise pricing Copa is not going away or is there.

Basically what's going on in the market now relative to the pricing that you are pushing through.

Yes, generally our sense is that mid single digit range is what the industry is doing.

There's always exceptions it remains a highly competitive market and so on a case by case basis, we still see pretty intense competition.

We believe that our level of increase is consistent with the market.

Thank you.

Yes.

Thank you. Our next question comes from David motivated.

Evercore ISI your line is open.

Thanks, Good morning.

Just had a question for MSS.

So.

Kevin could you just talk about the margin outlook there.

And how you think you can you can manage through the market volatility given some of the inflationary comments you made.

In your prepared remarks that may make it more difficult to manage the expense base than in the past.

Well, thanks, David I'm going to let Mike answer the question.

On that.

Hey, good morning, David.

I mean, clearly the as we.

We made our way through Q1 year over year results were up pre tax was up over last year, but as <unk> has continued to come down in the second quarter relative to last year, that's going to obviously have an impact on the profitability and the margin guidance.

The guidance, we provided over time as in a normal environment. We think a net margin of 35 to 40 range. We were at the higher end of that.

And well over that it late last year, given the market at all time highs and so what youll see in the expense side, what naturally comes down as those variables.

Those things that are tied to profitability like compensation asset based fees that we pay distributors and so we're still comfortable with that range, but you should expect that.

If the market stays where it is for the year, obviously the margins could be pressured relative to last year.

Yep got it that makes sense.

And then maybe just another question just for Dan.

Just in terms of.

Yes, the non Covid hit long term disability experience could you just talk about what youre seeing.

What you saw in the quarter or your expectations and if you are repricing the business or how you are repricing the business in response to that.

Yes, we definitely are seeing some elevated morbidity in long term disability.

We think some of that will persist, but may be not long term that may be a few quarters kind of impact.

As the labor market and employers find their equilibrium of how they want to work in the future.

However, like in our group life business, we are raising prices in our disability business as well to reflect these impacts coincidentally.

Coincidentally, it's the same mid single digits.

A range and we're generally seeing that in the marketplace as well so same effect, though you see case by case intense competition, but we do believe competitors are raising rates by a similar amount.

Got it thanks for that color.

Thank you. Our next question comes from Gabriel <unk> of National Bank. Your line is open.

Good morning.

The yield enhancement gains big Big uptick this quarter from what we've seen in the prior few quarters.

Over $100 million can you.

Tell me what that number would look like for 2017.

Okay Briolette managers good morning.

As you know the overall investment activity gains are largely driven by a couple of things the overall market conditions and our available funds that we have to put into into the market to invest and obviously, we had some pretty good conditions in the quarter and our investment teams took advantage of that to invest in good quality higher yielding assets and thats what drove the gains.

In the quarter on the <unk> 17 question, we'll handle that on our may 31st session that we have upcoming.

So we'll give you more details then.

Would it be materially lower.

I guess that gateway will give you more details on May 31.

And I guess this quarter I mean, the current accounting this quarter your pricing similar spread pickup opportunities alright.

Yes.

It will depend on sort of the market availability as well as the funds that we're putting into the market. So so far the market is.

As continuing to provide some opportunities.

Alright. Thanks.

Thank you. Our next question comes from Scott Chan of Canaccord. Your line is open.

Good morning.

Steve I'll ask and I'll see you really appreciate it.

The increase.

Updated disclosure on that.

Specifically, our FRE versus net income target that you updated last quarter.

And maybe going down to the margin I don't think Youre doing FRE target.

Margins were in the low <unk> and you talked about the 35% operated.

By 2025.

Is it safe to assume that operating margin would be aligned with that operating target or would there be nuances up or down.

Thanks, Scott. This is Steve I can answer that I think over time, you're going to see the main difference between FRE.

Those over time, youre going to see more performance fees.

As the business grows I think youre going to see more seed capital investments so you'll see more.

<unk> related income.

I think with our.

Margin for the quarter were on track, we think for the margin to parts that.

We set out for.

2025.

Some of the fluctuation youll see in margin quarter to quarter or even year over year can relate to things like catch up fees, which can impact the margin or marketing costs, we have a big fundraising in your expense marketing costs in a given quarter, but you havent earned the revenue yet because that will play out over time as the monies invested so you are going to see a bit of fluctuation in that but we do think we are on <unk>.

<unk> are on track for our targets.

Okay, and while I have you still what we're all seeing what's happening in the public markets private markets are you. All platform can you maybe describe any market headwinds that you're seeing or perhaps tailwind.

<unk>.

I think it's still a bit too early just to see what the long term impact is on either the underlying portfolios and are different.

Asset classes are on the fundraising I would say the first quarter fundraising we feel really good about.

With with rates going up and spreads going up that could have an impact on asset classes like real estate.

I would say our real estate portfolios were up strongly during the first quarter.

A couple of different ways.

Okay. Thank you very much.

Yes.

Thank you. Our next question comes from Paul Holden of CIBC. Your question. Please.

Thank you good morning, so going back to the U S group and the conversation around the normalization of experience and perhaps mortality staying.

Higher for longer is there anything in your mind that's changed.

Profit margin expectation, excluding the dental request.

Acquisition.

Good morning, Paul It's Dan Fishbein again, it really isn't obviously.

That we may see somewhat elevated more <unk>, although certainly nowhere near what we've been seeing.

<unk> seen over the past couple of years.

In the short term could affect margins, but as we reprice for that.

We should be able to reprice for that.

That would put us back at the same margins.

Yes.

As I mentioned in last call overall, our group benefits business is in the best condition that its ever been.

Sales are strong persistency has improved.

Getting the pricing.

We ask for that we need.

Had significant gains and expense efficiencies introduced new.

Products capabilities and digital programs into the marketplace all of those things position us very well in the previous margin guidance that we've given of 7% or greater.

Is still very much our expectation.

Absent COVID-19 effects, but the fundamentals of the business remain strong and remain as they were.

Great. Thank you.

Then.

Capital allocation question for Kevin.

The capital strength of the business, which is obvious we're seeing valuations drop is this leading to increased potential capital deployment.

Option and would.

Would you be willing to be opportunistic in this type of environment.

Environment with capital deployment.

Well thanks Paul.

As you know and we've talked about in other quarters, our priorities for capital deployment remain largely the same rate we're focused on.

Supporting our organic growth in our organic growth.

Target for EPS is 8% to 10% and continue on that we're committed to supporting our dividend and the dividend growth and we've outlined the 40% to 50% of underlying earnings and you saw the four 5% increase in our dividend this quarter of course, we've been able to deploy.

Into M&A that improves either scale or adding new capabilities like that then the question is going to be closing soon and thats going to use a big chunk of capital, but we're always looking forward at what the opportunities are across the three of those and we always keep the buybacks as a as an alternative.

If we if we see that the level of capital is is more than what we need we give it back to shareholders. So at this point in time, it's a combination of economic conditions uses we have for capital and we continue to look at all of the users.

Okay. That's great. Thank you.

Thank you. Our next question comes from Doug Young of days, our debt capital markets.

Your line is open.

Hi, Good morning, I guess this question's for shock I think group morbidity experience.

Janet.

Was adverse once again.

And I think that's been a recurring theme for a while here and I know that you are taking actions putting through price increases just wanted to get a better sense of what youre seeing on the ground.

And at what level of price increases are flowing through and when we might see that turn.

Doug. Thank you further question.

Youre right on the morbidity experience.

Unfavorable in the quarter.

With GB visibility as you say.

I might just remind you that.

We've got two things we're looking at one is the volume of cases, which we called the answer that and then how long.

The duration of case before people get back to work.

In May 2019, we decided to increase our pricing quite materially.

And that was to do with the fact that when it comes to answer them.

Our view and our models are suggesting.

The trend was what I would call durable trends.

And so we took action.

And today I can tell you Doug.

The incidence is in line with our pricing and our expectations with the issue is indeed as you pointed out.

On the duration.

Unlike answer that on duration.

We don't see this for now I think durable trend.

And speaking part of this is cole had access to care has been an issue people getting surgeries and so on.

So our view remains that this is temporary.

Of course, if signals were to change I would suggest.

That has a more durable pattern, we would take action.

This stage.

We think thats not the case.

Yes.

Okay.

And then just a question on the Asia business.

And there is a large India state or an insurance company in India going public.

And which is interesting and topical I'm just curious what if any of this has impact wise.

Sure.

You point in India, or Europe , India life insurance business.

Yes, I can start and then Ingrid is also it's Kevin Ingrid is also on the call. So I can let her add some some color yes.

<unk>.

We're well aware of is going public the LLC as the largest provider of insurance in the country. It's an amalgamation and 1950 619 57 evolve the insurance companies.

I think being a public company provides a level of discipline and transparency, which is probably long term good for the industry, we really like our partnership with <unk> The group we.

We have a strong position in both the insurance company in the asset management company.

I think that that doesn't change from the LIC going going public at all they were already a big competitor.

And so it's.

We're still.

We're still optimistic about India, and we think there's great potential there I don't know if Ingrid if you wanted to add anything.

And other than you would've seen we still had a relatively strong sales in the quarter.

We're excited about the business north of the digitalization, that's taking place.

We are well positioned best in class investment management.

I mean, we see that the valuations in India are quite high.

And I would tell you would note that the the P/e multiples are high and that shows you I.

The long term value creation opportunity.

In India.

Yes.

Thanks.

Yeah.

Thank you. Our next question comes from Mario Mendonca.

TD Securities Your line is open.

Good morning, if we can go back to policyholder expenses, our policyholder experience I noticed that expense experience was positive this quarter.

I kind of look back at the model to see like the last time that was true and I think I have to go back to Q3 2019.

You talked a little bit about why it would've lift signs this quarter and then on a related note. The other expenses are the other experience was.

Rather negative I'm, referring to the minus $41 million.

Is that expense I mean should we be looking at those two together is what I'm getting at.

Good morning, Mario just manage it so on the first item the sort of credit as you see in expenses. This quarter is largely due to some compensation adjustments that happen as part of the year end process.

And so thats why there was a true up for that so that that was a recovery in the quarter. So that's what you saw on the other other expenses that you mentioned, we do have some investments that we make in our businesses overtime that that are reflected in that line in one of those investments. Obviously, that's happening right now is higher for 2017, so along with some small.

Other investments, we're making the BG group so that's what's in that line.

Now I appreciate that Youre doing youre your update <unk> update in.

<unk> sorry later on this month.

Given the market interest in that.

Is there anything you can offer in terms, though.

The transition could mean to the company book value today.

Again, I think in America.

As you sort of say there is a.

A different components of that so I don't think it would really be.

Paul gave you a short answer to that I think we want to take the time to walk you through the various elements of that and how they come together on May 31.

Thank you.

Yeah.

Thank you. Our next question comes from Tom Mackinnon BMO capital Your line is open.

Yes. Good morning, Thanks for taking the question.

Just with respect to.

An unexpected dividend increase it kind of just shows there is some.

Reasonably good capital generation here.

I don't think we've heard anything about.

Kind of excess capital generation.

Since you gave us an $800 million.

The annual figure several years ago. So is there anything you can share with us with respect to excess capital generation.

At Sun Life, and then I have a follow up.

Next we focus on growing our dividend and as we've talked about our payout range is 40% to 50% of underlying income.

And so that leaves about 25% to 35% of underlying net income for excess capital generation to deploy before the impacts of market related items.

And if you were to take a look at that for the past year that would have been about $1 billion before those market related items, so a bit higher than the 800, we saw earlier.

That's great.

Just with respect to some of the discussions with Merck.

Morbidity.

Is is the thing that we should be looking at here more.

Just confirming that it might be more short term related.

Is and more COVID-19 related should focus be more on unemployment.

There is some sometimes anti selection and group morbidity so as long as we stay with relatively good.

Employment levels would you expect to group morbidity just a modest uptick that we saw in the quarter too.

Come back in as a result of.

Unemployment being as fairly.

Fairly muted here.

Tom I think we can let Dan answer that first for the U S and Jacques answer second for Canada.

Okay.

Sure.

As you know unemployment is almost at a historically low level. In fact, there is $11 5 million open jobs in the U S. Right now so we don't think unemployment is really a factor here.

Yeah.

We think there are other second order effects as I mentioned, including.

Employers.

Requiring people to come back into the office, who might not be fully comfortable doing that that's likely a transient effect. The marketplace will find its equilibrium is labor and employers decide how they want to work together in the future. So we don't see that as necessarily a persist.

Impact.

And Tom This is Jack.

Alert to that and I would say.

We don't see employment level being a material issue at the moment, what we're seeing.

It's really about durations as I said earlier.

I didn't mention it earlier, but the mental health cases.

Yes, a bit longer.

Their cases.

So.

The access to care, it's really an issue of how quickly we can get people back to work.

At the moment I would say, we don't expect that to be a durable trend, but we're obviously watching it very closely.

There's obviously an impact on our results.

Okay, if I could just squeeze one more as an impairment in the quarter. If theres any kind of color you can shed with respect to that.

Or how we should be thinking about credit going forward.

Tom This is Randy Bryan I'll take that yes.

The impairments for a couple of credits within our private fixed income portfolio.

We're entirely idiosyncratic in nature, and so not indicative of any trends either within <unk>, specifically or in the overall portfolio I.

I think overall youll see another positive credit released this quarter.

Albeit down from prior quarters, I'm very comfortable with the composition of the portfolio.

So so we have to see how markets play out as we look forward.

Okay. Thanks.

Thank you. Our next question comes from Lamar Prasad of core Mark Your line is open.

Thanks, My question, probably more for them.

And yet on the ground I.

I guess the outlook for earnings on surplus and that kind of $100 million range.

The rough target it may bounce around from quarter to quarter, but just looking.

Looking at that.

Our target in the context of what we've seen over the past two quarters some of the challenges associated with generating a FX gains in seed investment gains.

What's playing out in the market and rate environment does it feel like that $100 million Mark.

Is achievable.

This market backdrop I guess the reason.

You have to really go back over a decade to find a two quarter string of.

Earnings on surplus this week any comments there would be helpful.

Losses.

And that really reflects a wider credit spreads youre seeing there was some timing items in our investment income. We also had some higher debt costs, reflecting the higher flow rates on floating rate debt as well as the debt that we issued two to fund into question as you mentioned, a lower FX gain so altogether, that's what drove that number and given the current environment that we're in.

In.

As I mentioned in my prepared remarks, you'd expect the FX gains to be more muted, which could result in a surplus number below the $100 million range that we've been seeing in our previously but the other thing that I mentioned, obviously is also there is other components.

That also have differing impacts on those market related items, and we talked about it earlier in this call that that could also provide some opportunities on the investment activity gain side.

Okay. Thanks, and then if I can squeeze another one maybe just circling back to Aaron.

In earlier question around capital allocation for Kevin This.

Does management have the capacity to integrate dented class well digesting another acquisition.

With M&A kind of be off the table for a period of time.

It's a great question. Thanks, if we look at <unk>. It is the second largest acquisition we've ever made.

But it's got a great management team <unk> team have executed on.

Large acquisition and if you remember, it's really bringing a larger dental business into <unk>.

Smaller dental business alongside of ours, and so were pretty confident that that integration is going to go well and manage it actually mentioned, we've got the debt costs running through our our earnings right now, but we don't have the benefit of the earnings coming through so that's one thing that we're looking forward to but from the overall capital position, it's obviously going to use a big chunk of the four.

$7 billion, we have at the Holdco, we obviously see that we're in stressed times right now and if you look at the economic conditions.

But we are we do have a solid capital position and we continue to assess what the what the opportunities are so.

It is.

It is a use of.

The majority of the capital at the Holdco when the deal closes, but we continue to have an eye on things that will improve the business, but we're we have that financial discipline will not change and I think part of the financial discipline is looking at the economic conditions and what you are purchasing.

Alright. Thanks.

Thank you. Our next question comes from Nigel D'souza of Veritas investment Research your question. Please.

Thank you good morning, I had a follow up for you first on SLC I believe you mentioned, the $150 million and analysts annualized fee revenue.

That could be generated from AUM not yet invested wondering if you had a period over which you expect to realize that and.

What margin do you expect to earn on that revenue.

Hi, Nigel Thanks for the question.

When we raise.

Across our platform the expected investment periods can vary, but I would say, we would expect to get that money invested over 12.

12 months to 24 months generally.

And some in some funds the investment period can be three years. So that can that can be the case, but I would say if it goes into the third year in a given fund you've invested most of the assets by that by that time.

The type of funds that lead to lead to these non fee, earning assets are generally higher fee.

Asset classes. So it's real estate, it's alternative credit its infrastructure, where you raise money in a fund and then you draw it down and as you draw it down and invest money you're starting to fees.

Those are higher fee assets.

Compared to give out a specific margin on that but I would say that.

Across our platform those would be the higher fee assets that we manage and therefore.

There are semi.

Additional cost to go with those assets, but those would generally be our higher margin assets as well.

Okay. So I think it's fair to assume it's probably above 20%.

Based on what you disclosed on your on your fee related earnings margin.

And then the next question I had was on your.

In fact in investment activity its favorable experience this quarter.

And I was wondering if you could provide some color is that mainly yield enhancement and how sustainable do you think.

This quarter's run rate is given the yield environment that we're seeing today.

Hi, Nigel it's Randy Bryan I'll take that.

Some of what you heard in prior quarters is that we had built some dry powder coming.

Coming into this period with the expectation for the observation that credit spreads were near all time adjusted lows real rates were at all time lows equities were at all time highs. So we took some risk off the table and built dry powder some of that dry powder was deployed this quarter some of that dry this past quarter some of that dry powder will.

Deployed.

We see opportunities in Q2 and forward and we are seeing opportunities with the dislocations in the market and so that was that was a nice piece of another pieces mentioned mentioned was the strong <unk> origination originations in spreads.

And we are seeing that continue in Q2.

It's a matter of.

Deployment on the balance sheet in terms of how they flow, but we are seeing strong.

<unk> strong spreads there as well.

That's helpful and the last question I have for you and apologies if you already answered it.

On the IRS 17 update later this month did you mentioned that you'd be providing an update on the <unk>.

Expected impact underlying earnings or is that still further out.

Yes, I think we're going to cover a range of topics, including our outlook for our medium term objectives.

Okay I appreciate it thank you.

Thank you we have no further questions at this time.

We're trying things over to Mr. <unk> for closing remarks.

I would like to thank all of our participants today should you wish to listen to the rebroadcast it will be available on our website. Later. This afternoon. Thank you and have a good day.

This concludes today's call. Thank you for your participation you may now disconnect.

Q1 2022 Sun Life Financial Inc Earnings Call

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