Q3 2022 Sun Life Financial Inc Earnings Call

November 3, 2022

The conference will begin shortly to raise your hand during Q&A you can dial star one one.

[music].

Okay.

Good morning, and welcome to the Sun Life Financial Q3, 2022 conference call.

My name is Michelle and I'll be your conference operator today.

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

The call is you need bitten vice president head of Investor Relations and capital markets.

Please go ahead Mr Baeten.

Thank you operator, and good morning, everyone.

Welcome to Sun Life's earnings call for the third 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 Dotcom.

We will begin today's call with opening remarks from Kevin strain, President and Chief Executive Officer.

Following Kevin Magic thing Executive Vice President and Chief Financial Officer will then 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 are also 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, everyone turning to slide four we delivered strong third quarter results, reflecting the ability of our diversified businesses to deliver underlying earnings and topline growth even in a challenging environment. We saw the U S have strong sales results and almost double underlying earnings from last year with the addition of dental.

West strong health and risk solutions results and a significant moderation of COVID-19 related impacts.

<unk> grew insurance topline and underlying earnings as most of our markets began to emerge from Covid restrictions and we executed well on our growth strategies, Canada also delivered a strong result for the quarter, including strong insurance sales.

Management had strong flows as alternative assets continue to attract commitments.

<unk> continued to deliver on their strategy, but saw an earnings decline along with outflows as markets fell overall declines in equity markets impacted our fee income across MFS and our other equity sensitive businesses, including GRS and <unk> in Canada and asset management across Asia.

Interest rates are also having an impact as central banks continue to fight inflation by raising rates or light cat ratio remained at a solid 129% during the quarter. Despite negative year to date impact related to the rapidly rising interest rates.

Net income of $466 million for the quarter was down 54% year over year as a result of market volatility the write down of goodwill in the U K and an increase in SLC management put liabilities.

Underlying net income of $949 million was up 5% with strong U S Asia and Canada earnings. These results. These strong results driven by our protection and health businesses were offset by lower income in wealth and asset management, which were impacted by declines in global equity markets, our asset management businesses have strong fund.

<unk> focused on delivering strong performance and returns to our clients MFS as a top 10 equity manager in the U S retail space with a long track record of strong performance.

<unk> management, our alternative asset manager continues to generate strong flows and cross $200 billion of assets under management in the quarter underlying return on equity of 15, 5% reflected the strong earnings in the quarter approaching our medium term objective of 16% plus.

As mentioned earlier in my comments capital also remained solid in the quarter and we were pleased to announce a <unk> <unk> increase to our common share dividend.

Slide five provides just a few examples of business initiatives that drove our client impact strategy in the third quarter in September we announced our intention to acquire a majority stake in advisers asset management or AAM, a leading independent U S retail distribution firm.

M will become the U S alternatives retail distribution arm, a vessel fee management, providing an important new channel in the U S high net worth market.

Of course, we also announced the sale of our UK business to Phoenix and struck in asset management partnership with them, which we believe will be an important driver of flows for both MFS and SLC management.

We continue to enhance and expand our offerings for high net worth clients in Asia. This quarter, we launched <unk> global Aurora, our savings oriented indexed universal life product <unk>.

<unk> capital partners, our global infrastructure investment manager received five star ratings in the latest principles for responsible investment assessment.

Assessment. This is the seventh consecutive time that infrared has achieved the highest possible PRA rating for integration of ESG throughout its infrastructure investment practices. In addition, <unk> announced a new program with partners Health plan, a nonprofit managed care organizations, serving individuals with intellectual and other developments.

<unk> disabilities. This partnership will increase.

Access to oral care and help improve outcomes for this underserved community increasing health equity for all <unk>.

And in September sunlight health, once that new searches and adoption benefits benefit in Canada.

This was in recognition of how people.

Their families in different ways.

Slide six showcases digital highlights from the quarter, we continued to make great strides on our digital journey and have clearly seen the positive impact we can have in providing excellent client employer adviser and partner digital experiences. These are important steps as we begin to think and act more like a digital company as a leader in health and.

In the U S. We're helping clients access the right care at the right time through our new partnership with able to a virtual behavioral health therapy and coaching program for disability and critical illness members being treated for cancer.

We know that medical outcomes can be improved when people can manage their mental wellness at the same time as their physical recovery in Canada, We launched a new voluntary benefit <unk> App, where group benefits clients can now purchase life critical illness, and accidental death insurance coverage in one place at competitive group rate.

Medical underwriting health questionnaire has been revamped and written in simple clear language. These enhancements are already having an impact by reducing the application process for clients by up to 50%. This is a great example of how we're leveraging digital capabilities to make it easier for our clients to do business with us and achieve their health.

And financial security goals.

Unlike Canada was recently recognized as one of the best workplaces for mental wellness by Great Places to work. This is a significant recognition of the importance we place on mental health. Our goal is to ensure that all of our employees experienced sunlight as a safe place to work and we strive to empower employees to achieve optimal mental well being.

Fostered by our culture that values diversity equity and inclusion we know that giving employees everything they need to flourish helps them bring their best selves to work everyday and we are proud to offer a suite of programs and initiatives to support mental and physical well being.

I am proud of how the business continues to perform during these challenging conditions. Our strong performance is driven by our people and culture and our passion for helping clients achieve lifetime financial security and live healthier lives.

That ill hand, the call over to manage it will walk us through the third quarter results.

Thank you Kevin and good morning, everyone. Slide eight provides an overview of our third quarter results. The results reflect the strength of our businesses and the benefits of our diversified business mix.

Reported net income for the quarter was $466 million driven by strong underlying earnings partially offset by market related impacts our charge to write off goodwill related to the sale of our UK business, an increase in acquisition related liabilities, SLC management, and lower akamai gains compared to the prior year overall, our annual <unk>.

Actuarial review resulted in a relatively neutral impact of $7 million.

Underlying net income of $949 million and underlying earnings per share of $1 62 were up 5% from the prior year strong growth in protection health businesses, including moderating COVID-19 related impacts and a full quarter of contribution from <unk> more than offset lower wealth and asset management results.

Underlying return on equity was strong at 15, 5% for the quarter.

Book value per share was up 6% over the prior year.

Excluding impacts in other comprehensive income book value per share was up 7%.

We continue to maintain a solid capital position with lockout basis of 129% and 123% at SLA at.

Q3 leverage ratio was 26, 4%.

With the announced redemption of $400 million subordinated debt in Q4 pro forma Leverages 25, 6% and SLS like cat ratio it was 127%.

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

MFS reported net income of <unk> $240 million was up 7% from the prior year, reflecting fair value changes on outstanding share based payment awards.

Underlying net income of <unk> $212 million was down 18% driven by lower average net assets largely reflecting declines in global equity markets.

MFS generated a pre tax net operating margin of 41% the.

The operating margin increased by five percentage points from the prior quarter, primarily due to seasonally higher incentive compensation in Q2.

AUM of U S 509 billion was down 8% from Q2, largely reflecting lower equity markets and U S $10 3 billion of net outflows.

Retail net outflows of U S $5 2 billion in the quarter were impacted by slower sales activity as investors remain on the sidelines and an uncertain macroeconomic environment.

That said retail redemption rates have improved versus the first half of the year and MFS continued to experience lower U S retail redemptions as a proportion of AUM compare to the industry.

Institutional net outflows were <unk> $5 1 billion.

Turning to slide 11, SLC management had a reported net loss of $97 million and underlying net income up $20 million.

Reported earnings reflect an $80 million charge to increase the SLC management acquisition related liabilities.

The increase the increase reflects an updated a probability weighted outcomes that are used to estimate the liability at the maturity of the put call in 2026.

We plan to update these 5 billion around this time of year in conjunction with our strategic planning process.

Underlying net income of $20 million Sophie manager was down $15 million year over year. This reflects investment gains in the prior year as well as continued investments in the business.

Fee related earnings were up 12% from the prior year, reflecting higher fee income driven by strong capital raising activity and the deployment of capital into fee, earning AUM.

Capital raising of $3 8 billion in the quarter was driven by positive inflows across all asset classes.

Total AUM includes approximately <unk> 22 billion that is not yet earning fees.

Once invested these assets will generate annualized fee revenue of more than $180 million.

On slide 12, <unk> reported net income of $210 million was down from prior year, mainly due to market related impacts.

Underlying net income of $300 million was up 3% from the prior year driven by strong investment gains and business growth, partially offset by lower wealth management fee income.

Protection Health businesses saw continued momentum with strong <unk> sales in individual insurance and growth in sunlight house sales.

While sales were lower year over year, driven by weaker retail investor activity.

Turning to slide 13 U S reported net income of USD 72 million was up U S $35 million from the prior year and underlying net income of <unk> $166 million was up $78 million.

The results were driven by strong group benefits performance and a full quarter of dental quest contribution. We're very pleased with identical results this quarter, which were great expectations.

Expectations.

We are making good progress on our integration milestones and are confident that we will meet the earnings and expense synergies that we outlined last years.

Group benefits earnings reflected a strong business fundamentals, we have highlighted in prior quarters. This includes good client persistency growing premiums and solid stop loss pricing margins.

The results also include a significant moderation of COVID-19 related mortality and disability impacts.

Sales growth in the U S was strong up 78% year over year and up 14% excluding contribution from dental.

As a reminder, going forward dental sales can be highly variable quarter to quarter due to longer sales cycles and larger contracts in the government program space.

Overall following the following the <unk> acquisition more than 70% of our annual benefits revenue in the U S will be generated by health care businesses, which have shorter terms and generate higher returns.

Slide 14 outlines Asia results for the quarter reported net income was $125 million down 55% year over year in constant currency as the prior year included a large akamai gain comparative reserve strengthening this quarter.

Underlying net income of 175 million was up 23% year over year on a constant currency basis.

This strong result was driven by improved mortality are moderating corporate related experience and favorable investing gains.

Our joint ventures in Asia also contributed to year over year growth, including favorable mortality in India, and improved policyholder and investment experience in China.

<unk> earnings were down reflecting lower equity markets.

Asia reported double digit insurance sales growth in nearly every market and we're seeing strong momentum as the restrictions are being lifted new products gain traction in their respective markets and the rollout of new digital capabilities.

On the wealth side, we experienced net outflows in India, the Philippines, and Hong Kong, reflecting market volatility, which led to weaker investor activity.

Overall, we are pleased with the third quarter results throughout a period of significant volatility over the last few years. Some lives underlying earnings have remained resilient.

As we look ahead, we expect the near term operating environment to remain challenging.

We believe our diversified business model established business leadership positions strong talent and prudent risk management will be key strengths and managing through this environment with that I'll turn the call back to you need for Q&A.

Thank you management to help ensure that all our participants have an opportunity to ask questions. This morning, Please limit yourselves to one or two questions and then re queue with any additional questions.

I will now ask the operator to poll the participants.

Thank you if you'd like to ask a question. Please press star one one.

Your first question comes from Scott Chan with Canaccord Genuity. Your line is open.

Good morning.

My questions are on Msr's mandate, you talked about the gross redemptions on that platform being better than the industry, but when I look at the gross sales that seems to be more the issue.

Two quarters down materially sequentially. So just.

I'm wondering if there's any kind of color on the gross sales picture. There is it performance issues is that.

Products being overweight equity any color would be kind of helpful. Looking forward.

Well I'll hand that over to Mike Scott.

Hey, good morning, Scott Micro bearish.

If you look at industry, what's happening in the industry as sales are down pretty dramatically.

All product types, we see that across the equity we see that across fixed income product types and so when you look at our share of outflows. So again sales net.

The function of sales and what clients are doing on the redemption side, we control controlled sales, but on the net side. When you look at our net flows in the industry relative to our assets our share of active assets were generating.

Less outflows in the industry is relative and so the way that we're looking at it as sales are tough right now.

Clearly with the volatility of the markets.

We think that theyre going to stay tough for some period of time until the fed gets to sort of the end of the cycle and volatility comes down and people can look through the other side of the economic slowdown and so we think we're holding our own relative to the industry, but the dynamics are pretty challenging right now in the retail industry.

And if I can switch sneak in one more big picture question on asset management, and maybe for Kevin or Mike.

Clearly on the challenges on the traditional side and Thats well see on the alternative side.

Doing quite well specifically at your firm is there any.

Down the road, where you can do something together like amongst the groups like in terms of product.

Or is any of that being done right now or is that something that you just kind of leave separate for now.

Well, Scott, we announced the Phoenix transaction earlier, this quarter and that's an area, where both MFS and SLC will be fund managers for Phoenix. They were both part of the strategic <unk>.

<unk> of course, as we think about flows Steve and Mike talk about things, but they're very different asset classes right. So MFS is of course in the public equity and fixed income and Steve has across the alternative space. So.

There is obviously discussions that happen across both but they are run as separate entities.

Okay got it thank you.

Your next question comes from Tom Mackinnon with BMO. Your line is open.

Yeah. Thanks, good morning.

Just one question with there are two questions. The first is on if we look at the impact of new business, especially in Canada, We had seemed to have some better sales.

At least in the individual insurance, but.

The impact of new business is down significantly was that largely just due to DB solutions sales being down and it may be.

If that's the case then what's the outlook for DB solutions sales going forward just given the.

The interest rate environment and.

The macro environment as well and then I have a follow up thanks.

Tom This is art.

Let me start with that so new business gains are down.

Identified it.

If you remember Q3 2021, we had lumpy good lumpy sales in defined benefit solution. We've got good sales this quarter, but not nearly as good as last time.

That's the main driver.

Individual insurance.

The sales are up but the mix is less favorable theres more par.

Doesn't generate as much business gain.

So in terms of the outlook.

Defined benefit solutions as you know the key metric there were clients execute or not annuity buyout because theyre funded ratio.

And funding ratios remain fairly healthy pipeline going into Q4 is looking very strong right now so.

I've said many times before that this is a growth market for us when we compare to other jurisdictions that are way ahead, whether you ask on U K.

It is still relatively nascent market, we've got a great team.

<unk>.

We tend to do very well in particular deals are innovative and complex. So we're quite confident about the growth potential of UBS going forward.

So thats great.

And the follow up question is if I look at the earnings on the surplus the investment income component of that the first quarter was $90 million second is a 122 third quarter $163 million.

I mean interest rates must be helping but.

Maybe you can give a little bit more color because.

Longer term you wouldn't you wouldn't.

Wouldn't necessarily be mark to market. There is no gains is just strictly coupon clipping. So maybe talk about what you've got here and what your outlook would be for earning the investment in component of earnings on surplus as interest rates rise.

Thank you for your question, Tom It's mentioned, yes, so youre right. The the main factor driving that growth and investment income has been a significant increase that we've seen in interest rates really throughout the year and then that does take a little bit of time to work its way through but really you saw significant increases in Q2, and then the first part of Q3.

That really helped to drive that quarter over quarter increase now there are few other components within the earnings on surplus.

Available for sale gains and other impacts that you can have on securities, but those are more moderate and those can shift a little bit from quarter to quarter, but the big impact was the impact from the interest rate increases.

So, but if you were invested in longer term bonds. You just kept the same coupon there is no market value impact here. So if we have anything unique about what you're invested in.

Yes, we do have a fair bit of short term instruments, including and we also have some floating rate assets as well. So as short term interest rates go up you do get an increase in investment income.

Okay, and if I could just squeeze one quick one just with respect to morbidity morbidity the outlook in the U S seems to be improving significantly how.

How should we be looking at that going forward.

<unk> had some troubles before we've got an uncertain economic environment is breakeven best because the quarter seemed to suggest that it would be better than that.

Hey, good morning, it's Dan Fishbein, so on morbidity, we there's obviously different parts to this first of all the biggest positive impact in the quarter certainly continued to come from our stop loss business, where experience was still quite strong.

That's mostly due to good pricing and underwriting there is also a bit of a benefit there still.

From lower utilization in hospitals due to COVID-19 impacts making capacity in hospitals less.

Less available, but most of the impact came from underwriting and pricing than in our disability businesses, we did see a more direct.

Reduction from Covid incidents in the quarter sequentially.

PD and LGD experience was somewhat better obviously, you know we're coming off of what was a very difficult Q4 and Q1.

In terms of Covid incidents and of course disability claims can last a while they tend to some of those obviously still related to that earlier incidents.

But both of those.

We hope that LCD and STD incidence, we will continue to improve.

And we're confident that the stop loss morbidity is strong and is mostly related to our actions.

Okay. Thanks.

Next question comes from many Grumman with Scotiabank. Your line is open.

Alright good.

Good morning.

Question on the U S certainly overall.

<unk>.

Definitely all mark of the results this quarter, but I wanted to understand better downside risks from recession in the U S. As we look out to 2023.

We've talked before about I wanted to revisit it in terms of the implications for the U S.

And specifically.

It's the vulnerability.

We need to see a big spike in the unemployment rate for that business to really get impacted.

Presumably the group benefits business is.

More at risk than the dental business I wanted to understand some of the dynamics.

In terms of thinking through downside economic scenarios in the U S for that for your U S business next year.

Sure Manny this is Dan again.

A few thoughts on that first of all obviously the biggest economic impact we're seeing right now is inflation and inflation at least in the U S benefits business actually tends to give a boost to results benefits.

Benefits are and many of the benefits we offer are based on wages. So as wages go up the volumes go up as well also in a very tight job environment, we're finding that.

Employers are very interested in providing very attractive and competitive benefit so thats driving up.

The uptake rates in the amount of benefits being offered if we ended up in a recessionary environment kind of to your 0.1 of the things we.

Typically see is some uptick in long term disability incidents. However, historically that does take a few years to play out, but that's certainly one thing.

We would have to watch closely as far as the recession, causing some reduction in benefits what were finding coming out of the worst of the pandemic is that both employers and employees value benefits, even more than they did before the pandemic and we think those trends will continue.

So benefits are one of the last things, we think that employers and their employees would move away from so we're less concerned about volume but of course as always if there is a recession there might be some pressure on LTV incidents.

And then just as a follow up in the group benefits business in particular, we talked a lot about the after tax profit margin and you reiterated the 7% guidance last quarter, just wondering how that.

We don't really Havent, we don't really have good history for that measure, but based on your experience what could that profit margin look like in a recessionary scenario is there any way to kind of.

Approached that.

From your perspective.

Yes, I think thats really hard to say again based on the comments I just gave.

There would obviously be some pressure on LGD, but not necessarily in other areas I would point out on the profit margin by the way and it is a four months up four quarter trailing indicator.

So as we drop off some of the prior really weak quarters from last Q4 last Q1, we'll.

We will see that go up but in terms of what would happen.

In a recession, it's really very hard to predict.

Got it thank you.

Yeah.

Okay.

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

Good morning, My first question, it's a little bit accounting intensive, but I want to understand how those.

So I'll see acquisition liabilities that were booked in the quarter how did those liabilities eventually come off the balance sheet are they is there an actual payment that's made or is it offset against some other.

Counting items can you help me understand that.

Yes sure Mario.

Right.

We're accruing for what we think fee.

Liability will be at the maturity in 2025 and 26, when we have the put option our call option and so once we exercise that the liability will come up with the office that will be a cash payment.

Yes, so the liability never close back into earnings in any way, it's actually a payment.

Correct. Okay. The other thing I wanted to just quickly touch on that is.

And this is more something that just impresses me with MFS I. Appreciate there is a challenge here, but I've been.

Kind of surprised by how quickly the expenses have ratcheted down what are we seeing there is that simply just the commission.

Really fallen as gross sales have fallen or are there other activities or is there just a lot more of a variable component here.

Maybe I appreciate it.

Hey, Matt I'll take that it's micro Baird good morning Mario.

If you look at our cost base 70, 70% of our costs are fairly formulaic in that the compensation pool flex is downward with profitability in an environment like this asset based payments, we pay the dealers flex down as assets come down and then in a tougher sales environment sales commissions will come down as well and so.

We would prefer to pay up sales commissions, even in a tougher environment, but that's not the environment that we're in now and so there is a fairly variable component to our expense base.

That obviously helps although there's clearly some negative operating leverage in the business because we do have some fixed costs even as.

We make our way through the cycle.

That's actually the observation I was making that the company is actually generating positive operating leverage despite everything that's going on so.

Just seems odd to see.

Well if you look at you to kind of look at it year over year. So as management mentioned, we do have youre looking at quarter over quarter, you got the seasonality in the first half of the year, where we amortize long term stock compensation. If you look at the last year.

Year over year third quarter, and down 17% pretax down 18%. So it have flex down with there are some there are a couple of offsets to that interest income being one of them.

Which has helped us as interest rates have gone up but it effectively if you look at it year on year Youre going to see profitability tends to follow at <unk>.

Thank you for your help.

Yeah.

Your next question comes from Doug Young with Desjardin. Your line is open.

Hi, Good morning, just wanted to go to Asia.

And look at the new business, new business losses, and you pointed out that sales were strong.

And all of the regions I think management, you mentioned that in your comments.

But we're not and obviously interest rates have been moving higher but we're seeing a deterioration in new business losses.

Not an improvement I'm just wondering what the mechanics are and why that is unfolding and then in the same vein on Asia underlying earnings up 23% constant FX can you break out.

How much of that was driven by local market versus international on an underlying basis.

Ingrid Johnson yen.

To your question on new business strain, if you look XD previous year on this yet.

Just a small $3 million down and Thats really a function of international way. The sales are lumpy and so we wouldn't necessarily have that come through every quarter and then clearly we also are investing in the business as we build scale. So you would see strong insurance, but also then reinvest and then particularly on the digital side.

Good.

Okay.

And then just to the local markets. This has that draws actually just deal stream.

Each of the individual businesses, because what you'll see in <unk>, which is a Hong Kong and mainland China as well as high net worth.

That is effectively August three selective origination where you would see.

The ability and the sales, but much more positive on new business gains as we make sure we have positiveness D&B.

On the China perspective, still constrained in the cross border MTV fix but yet within China, we've seen good momentum, particularly in Banca Hong Kong was very encouraging with the emergence of sales, but it was a very weak prior year quarter.

Again absences of mainland Chinese visitors.

Im good product innovation that we've seen.

Good take up.

Slightly less profitable mix.

From the local market, let's say extremely encouraging you see very strong momentum on all the sales and even in Indonesia, where we've seen strong banker growth. So that is a common theme across all of our markets in fact, including India, China, and Malaysia, and Indonesia, and then the other important aspect is the focus on specific.

Client segments, where we've enhanced the case size again, that's playing through into underlying net income.

Insurance income is clearly showing the benefits of emergence from the pandemic. However wealth is.

It's mark <unk>.

Beth described we're seeing the same effects in Asia, where there is a risk off mindset and a slight away from money market funds to more competitive bank products that we see that come through and underlying net income and Ed and clearly thats the <unk>.

Maybe just to simplify it is are you seeing new business gains in international.

<unk>.

New business license in local markets is that kind of make that in France or is that not the case.

Okay.

It's driven by a multiplicity of factors because international will be focused on new business gains otherwise you wouldnt wish throughout the business, whereas you are going to see more of an interest in some of the other markets, where we are investing.

Okay, and then on just on the underlying earnings when we look at <unk>.

International versus local markets like any sense.

Drill down on is more of that underlying earnings coming from the international side, because it does new business gains.

Okay.

Hi.

Internationally is definitely more profitable, which is what we've seen so that sales would have been down that would have been more profitable.

But again, that's also a function of likewise for Hong Kong and you mentioned from the pandemic. So you can start to see a more positive impact.

Yes, Okay. That's fine and then just one for Dan on the dental question that the.

I think you show reported earnings I think for dental up nine I'm more curious as to what the underlying earnings contribution from dental Quest wise.

If you can quantify that and can you provide a bit of an update on how the.

The integration is going because from the outside looking in it looks like it's going well just wanted to get a lot more detail.

Sure Doug.

If you look at the <unk>.

The integration expense line that we show the $18 million. There is essentially all dental class you could make that that inference and just add the <unk> and the nine back together and you get 27.

24 of that comes from Dent to quest in the quarter and of course. This is our first full quarter.

And there's a few puts and takes but basically that is in line with the accretion target that we set when we announced the transaction. So we're very pleased obviously to be on the market in the first full quarter overall, the integration is going very well we're on target for our expense synergies the integration.

<unk> itself in terms of putting teams together and making decisions is on schedule.

And going well and I'll also add that to quest has a very good pipeline one of the strongest pipeline they've ever had now.

Government sales, which is a big portion of what they do they tend to be lumpy.

So sometimes you get a quarter, where there's a couple of big sales and sometimes you don't.

As I said the pipeline is very strong.

I appreciate it thank you.

Yes.

Your next question comes from Gabriel Duchesne with National Bank Financial Your line is open.

Yes, I just wanted to follow up on the.

Alright any surplus.

The makeup.

Makeup of our portfolio can you maybe provide.

Some duration characteristics of the portfolio what percent of them.

Floating rate.

And how that could change.

The change already.

Over.

The next little while.

Considering locking in some.

Yes.

Bond yields.

I was going out five years.

Five year end of the curve move year to year, but.

Thank you Gabriel.

So I'll start that that gave us manage it so I would say it isn't the sort of floating rate aspects I spoke about earlier.

In terms of what's driving the investment income related to the interest rate increases that doesn't amount a lot from quarter to quarter.

Obviously, we do look at our portfolio on a regular basis and we.

We would rebalance and as we see fit but that's not really what's driving the earnings on surplus this quarter.

Okay.

Gabriel it's Randy Brown so.

I'd add to that.

Surplus money comes in and out of the surplus is.

Dividends come in now and needs for.

Various business needs or collateral posting et cetera. So it does move around a bit but it's a big portfolio.

And what I'd say is we anticipated short rates rising in deed move into floating rate assets.

Purposefully and and we did get the benefit of that.

So there was a tactical decision made at some point it should continue.

Generally similar levels of income until a later time or are you, making any other decisions.

I'm trying to get a sense.

We're seeing the sustainable.

Well, we have seen from from yesterday's fed announcement to market reaction is an expectation of continued short rate rises. So we should be able to benefit from that and as some of the coupon threes.

Okay.

But longer term.

We will get to a point of peak.

Peak rates and would expect those forward expectations to begin to drop.

Right, Okay, I really just wanted to make some changes.

Making any allocation.

Allocation.

Good luck.

Thanks.

No no no no big.

Allocation decisions.

<unk> gave you.

Your next question comes from Lamar Prasad with Cormack Securities. Your line is open.

Thanks, I just wanted to come back to Dent to quest now that Youre, a couple of months into having it.

Under Sun life I'm wondering if you could we could revisit the topic of potential revenue synergies I seem to recall that at announcement the synergies estimate was just.

Talking about expenses, but not revenue so is that correct.

I'm wondering if you could size that up for us.

Yes, I can make some qualitative comments on that.

So.

Of course, then to quest is primarily focused on the government programs business.

In dental which is an area that we were not in before so theres not a big overlap there, but where they're very possibly can be revenue synergies is as we put the commercial businesses together and really charge up the legacy Sun life, and even assurance commercial business.

With the capabilities that come from the much larger at scale Dent to quest business. So you are right that we didn't put a lot in our projections around that that would potentially be upside for us that will emerge will over a longer period of time, but we're already seeing some benefits from that.

For example, this year, our commercial dental sales are up significantly and thats, great because thats one of our highest margin highest Roe products.

And we.

We also anticipate going forward.

A more competitive product and also more opportunities in our partnership business in fact during the quarter.

We made major progress with a significant new commercial partnership and it was the first time that dent to quest and our full scope business had collaborated together to offer a broader array of products to a potential partner so to your point, we definitely see opportunity and upside.

There.

We'll obviously have more to say about that as those things emerge.

Great. Thank you.

Your next question comes from Paul Holden with CIBC. Your line is open.

Thanks. Good morning, just wanted to quickly go back to the discussion on <unk> asset management in that.

Liability associated with the future buyout.

And I guess, what I want to better understand is what exactly is driving the increase in the future liability and I'm assuming.

It implies that there are certain components associated with the future buyout that are exceeding your prior expectation and assumption so what exactly is it.

Exceeding your prior assumptions.

If I'm correct good morning, Paul.

Yes, good morning, Paul its management, so as we said the liabilities out into the future. So one of the things we have to try to do is to think about what the.

It's felt largely driven by EBITDA as well so we have to try to project what the EBITDA will be doing.

So we haven't we haven't we've run some scenarios as to what that number would look like in 2025 and 2026, obviously as we get closer to the timeline, we can narrow those scenarios because we have more line of sight. So thats, what youre sort of seeing this quarter is that we were able to narrow those range of outcomes and that resulted in the higher liability.

Okay.

And when you say narrowing I understand narrowing of the range, but as maybe the average of that range also moving.

Hey, Matt.

It'll be the average of that range and I guess, if you look at the scenarios that we've run the average would be higher yes.

Remember the target that we set at Investor Day was a base number and so.

That base number is different than what the average that we're using for the liability.

Paul It's Kevin strain fundamentally it's a good thing when we see this liability going up because it means we're generating value in the investments we've made in SLC and that generation of value will be reflected as Mario asked earlier in the purchase price. So it's really a reflection of our estimate of value creation inside of the Soc business.

Mrs.

Italy totally get that.

I'm just trying to trying to understand what is it.

That's transpiring, that's exceeding our initial expectations and give some details around EBITDA and maybe drill down is it.

Asset growth and flows have exceeded expectations is it margins are exceeding expectations or are there.

Other factors I think that's kind of what I'm trying to understand.

It's Kevin I was CFO at the time and we were when we bought these things we were looking at a five year time period, and there was a fair amount of uncertainty of what equity markets and real estate markets and interest markets and those types of things would look like so when you set up your initial estimate you factor in all of those things and over time, we get more certainty of what that.

Going to be in 'twenty five 'twenty six.

Okay.

This is Steve Peacher, maybe I could just throw in a comment or two if you look at the underlying drivers of the business. It's all about are you raising is your investment is your investment performance strong do you have the right products and that will manifest itself in higher AUM. So if you look at our <unk> measures.

And then fee, earning AUM both are growing at pretty good rates. So when we and when we think about that going forward. We continue to feel good about that.

That drives in management fee revenue.

And as that grows there should be some positive operating margin in the business, we expected that and I think the more we get into this.

We've got ups and downs, but the better we feel all in and then that reflects kind of the weighting of the various scenarios that we look at when we try to have to project the future.

As we have to kind of boil that down into.

Our liability every quarter, but our fundamental view is that we feel pretty good about the momentum we have and then we feel good about that continuing over the next few years, which will drive our ultimate payout in these deals.

Okay. Okay. Okay. That's helpful. Thank you and then one quick follow.

A follow up and I guess this is for Dan.

Mentioned inflation tailwind behind.

Pricing in and I think stop loss and group benefits just wondering if you can give any more.

Sort of color flavor around.

Your view on the upcoming renewal cycle I imagine based on the commentary you said that it looks strong but any any further thoughts there would be I appreciate it.

Yes.

Yes sure.

Obviously in the biggest sales and renewal time of the year. So in the stop loss business. For example, 70% of the business is sold and renews during the fourth quarter for January 1st dates.

And we're also in the same season and for the group and dental businesses as well.

I would tell you that as always the market is quite competitive and we always have some competitors who are perhaps being overly aggressive we will always tilt towards margins versus sales volumes.

That will play out.

Over the next several weeks.

Especially in the stop loss business. No question, there is a little bit of pressure there right now at the same time.

Inflationary pressures and then in the in the group business, especially the impact of Covid mortality is causing all participants need to raise their prices appropriately. So we have a couple of counter balancing forces there definitely some inflationary and experience related.

Price increases and a significantly competitive environment.

That's great I appreciate it thank you.

Yeah.

Yes.

Your next question comes from Darko <unk> with RBC capital markets. Your line is open.

Hi, Thank you good morning, everyone and I apologize. If this has been asked I had some difficulties with the falling.

The first question is with respect to Asia.

Does it looked like sales are on fire in Vietnam, which is great but at the same time, we had some policyholder updates there some adverse labs can you maybe just talk to the lapse issue and.

What it was that caused that and how should I think about the strength of Vietnam going forward.

Okay.

Thank you very much for your question Ingrid Johnson, and we are very excited about Vietnam and the opportunity and we are seeing a twofold impact.

Bank assurance relationships with TD bank, and ICD as well as agency as we attract a very quality agents that were already seeing uplift in sales. So that is a positive momentum that we should expect but clearly off a low base. So the percentages with Mr. Over time on the bancassurance.

Ali Bancassurance relationships than we would have upped the Tommy initial sales.

Sales relative to bank products that we needed to change as we experienced net negative.

Negative and that's what we've corrected this quarter so going forward, we should expect a more positive outcome as we've shifted.

Understand more relevant client statements that are appropriate for the product that we sell and reduce the mix of insurance sales relative to bank to shorten bank line.

Okay, Great. That's helpful. So the product has been changed.

<unk>.

And my next question is for.

For man, just maybe Kevin Morrissey.

You guys provided a very helpful update.

May on <unk> 17.

And the one thing that I haven't seen anything in an even worse. This quarter. So I just wanted to confirm that nothing has really changed since then you've probably got a better understanding of how things look under Ifr F. 17. So just wanted to confirm that and when we think about forward numbers for 2023 under Ifr F 17, we should still expect.

<unk> positive.

Underlying net income growth off of 2022 does that is that a.

A good assumption for me to make and are there any learnings.

So far that would change any of the thoughts or ideas that you had since may.

So I'll start that and Kevin can chime in as well. So overall there is no new information that we're providing this quarter Darko. So the information that we provided at May 31st is still appropriate as you said, we're still working through all the impacts that we're continuing to do our dual runs this quarter.

The underlying earnings just like the R&R FRS.

A number of factors, including the market environment. So that will be also a factor in terms of what the year over year underlying growth will be.

Kevin do you want to add anything yes, not a lot to add Darko, it's Kevin Morrissey here.

We have been going through as you mentioned, our dual reporting so we've gone through a couple of quarters, we're into our third one now.

I'd say its quite good news in that is just confirming the information and deepening our understanding of the business, but we aren't seeing any changes. So I think thats. The good news is it's not changing any fundamental messages from the update we gave in may.

Okay, great. Thank you very much for that confirmation.

Okay.

Your next question comes from Nigel D'souza with Veritas investment Research your line is open.

Okay. Thank you and good morning, I wanted to follow up on the debt side two sizable.

<unk>.

Quarter end this quarter and those are of lower coupon.

The other thing that I'm, just trying to get a sense of how that could impact.

The interest on that component of earnings on surplus going forward that components higher quarter over quarter as higher year over year should we expect that to trend upwards.

And the environment.

I guess pressure on earnings on surplus going forward.

Good morning, Nigel manager so the increase in the debt cost is also related to the fact that would be closed into quest last quarter. So you had the debt that we issued for dent to quest.

It's showing up there and then we also did.

<unk> issuance of the sub debt Thats maturing in November . So those are the two components that contributed to higher debt costs and earnings and surplus what youre, saying.

Any comments on that component going forward should that continue to trend higher or has it stabilized at this point.

Well, we're going to we're going to see we're going to as I mentioned in my prepared remarks were going to redeem the maturing debt in November that will be outstanding for some of the period and some of that debt is floating rates. So as interest rates go up but youre going to start to see some changes in that number as well.

Okay, Great and my second and last question was.

On the asthma side I noticed that you had a favorable impact related to mortality, particularly.

UK and group retirement.

Just trying to get a sense of.

Is there down the line.

That might be unfavorable mortality driven by COVID-19 so far.

We went back shopping experience.

Any sense of when that could show up on the actual liability side.

Thanks for the question Nigel This is Kevin Morrissey, So youre right. We did see some very favorable impacts from Mcmahon mortality, both in Canada and in the UK.

And.

That was on tailed annuity business, but it was not related to COVID-19. So I do want to emphasize the fact that we did get some favorable experience going through COVID-19, but the update that we made to the actual assumptions did not include that there was no significant impact from that in longer term on other businesses I'd say, we're still observing and we'll see with the.

Future will hold but we have seen kind of a neutral expectation as we've seen on the life insurance business.

On some of the longer term business is its been fairly benign and on some of the <unk>.

Businesses, where it's been more severe in the shorter pricing valuation cycle like the group business. So.

Okay I appreciate that thank you.

Okay.

We have no further questions at this time and I'll turn things to Mr. <unk> for closing remarks.

Okay.

Today's call a replay of the call will be available under the Investor Relations section of our website. Thank you and have a good day.

The conference will begin shortly to raise your hand during Q&A you can dial one one.

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