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Operator
it year on year, you're going to see profitability tends to follow what ANA is. Thank you for your help.
Gabriel
Your next question comes from Doug Young with Desjardins. Your line is open.
Doug Young
Hi, good morning. Just wanted to go to Asia and look at the new business. of new business losses, and you pointed out that sales were strong in all of the regions. I think, Manjit, you mentioned that in your comments. 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, you know, underlying earnings up 23%, constant FX. Can you break out, you know, how much of that was driven by local markets versus international on an underlying basis?
spk00
It's Ingrid Johnson here. So to your question on new business strain, if you look actually previous year on this year, it's actually – just a small $3 million down, and that's really a function of international where the sales are lumpy, and so we wouldn't necessarily have that come through every quarter. And then clearly we're also investing in the business as we build scale. So you would see strong insurance, but also then reinvestments, particularly on the digital side. If I then move just to the local markets versus hubs, I'd rather actually just deal through each of the individual businesses, because what you'll see in a hub which is a Hong Kong, mainland China, as well as high net worth, that is effectively either through selective origination where you would see some variability in the sales but much more positive on new business gains as we make sure we have positive net V&B. From a China perspective, still constrained in the cross-border MCV effects, but yet within China we've seen good momentum, particularly in Banker. Hong Kong was very encouraging with the emergence of sales, but of a very weak prior year quarter. Again, absence of mainland Chinese visitors, but some good product innovation that we've seen, good take-up, albeit a slightly less profitable mix. From the local markets, also extremely encouraging. You see very strong momentum on all the sales, 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, Malaysia, and Indonesia. And then the other important aspect is a focus on specific client segments where we've enhanced the case size. So again, that's flowing through into our underlying net income. So insurance income is clearly showing the benefits of emergence from the pandemic. However, wealth is similar to, as Mike Rebej described, we're seeing those same effects in Asia, where there's a risk-off mindset and a flow away from money market funds to more competitive bank products. So we see that flow come through in underlying net income as an adverse, and clearly that's the cycle we're in.
Doug Young
Maybe just to simplify it, are you seeing new business gains in international and new business losses in local markets? Can I make that inference, or is that not the case?
spk00
I think it's driven by a multiplicity of factors, because international will be focused on new business gains. Otherwise, we wouldn't wish to wrap the business, whereas you are going to see more of an adverse in some of the other markets where we are investing.
Doug Young
Okay. And then just on the underlying earnings, when we look at international versus local markets, like any sense of drill down on is more of that underlying earnings coming from the international side because of those new business gains?
spk00
I mean, international is definitely more profitable, which is what we've seen. So those sales would have been down, that would have been more profitable. But again, that's also a function of, likewise for Hong Kong, an emergence from the pandemic. So you're going to start to see a more positive impact.
Doug Young
Yeah, okay. That's fine. And then just one for Dan on the DentalQuest. DentalQuest, I think you show reported earnings, I think, for Dental of 9. I'm more curious as to what the underlying earnings contribution from DentalQuest was if you can quantify that. And can you provide a bit of an update on how the integration is going? Because from the outside looking in, it looks like it's going well. Just wanted to get a little more detail.
Dan
Sure, Doug. You know, if you look at the integration expense line that we show, the $18 million there is essentially all DentiQuest. You know, you can make that inference and just add the 18 and the 9 back together, and you get 27. 24 of that comes from DentaQuest in the quarter. Of course, this is our first full quarter. And there's a few puts and takes, but basically that is, you know, in line with the accretion target that we set when we announced the transaction. So we're very pleased, you know, obviously to be on the mark in the first full quarter. Overall, the integration is going very well. We're on target for our expense synergies. The integration itself in terms of putting teams together and making decisions is on schedule and going well. And I'll also add that DentaQuest has a very good pipeline, one of the strongest pipelines they've ever had. Now, with government sales, which is a big portion of what they do, they tend to be lumpy. So, you know, sometimes you get a quarter where there's a couple of big sales and sometimes you don't. But as I said, the pipeline is very strong.
Doug Young
Appreciate it. Thank you.
Gabriel
Your next question comes from Gabriel DeShane with National Bank Financial. Your line is open.
Gabriel DeShane
Yeah, I just want to follow up on the earnings on surplus and the makeup of that portfolio. Can you maybe provide some duration characteristics of the portfolio what percent is in cash and floating rates and how that could change if it hasn't changed already over the next little while if you're considering locking in some higher bond yields. I expect you're not going at the five-year end of the curve, maybe two-year, but educate me.
Kevin Morrissey
I'll start. 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 move around a lot from quarter to quarter. Obviously, we do look at our portfolio on a regular basis, and we would rebalance it as we see fit, but that's not really what's driving the earnings and surplus this quarter.
Fullscope
okay yeah this is uh gabriel it's randy uh brown so um i would add to that you know surplus money comes in and out of surpluses uh dividends come in and out and needs for uh various um business needs or collateral posting etc so it does move around a bit but it's a big portfolio And what I'd say is we anticipated short rates rising and did move into floating rate assets purposefully, and we did get the benefit of that.
Gabriel DeShane
So there was a tactical decision made at some point. It should continue to generate similar levels of income until rates are cut, or are you making any other decisions? I'm trying to get a sense of... We are seeing the...
Fullscope
Well, we have seen, you know, from yesterday's Fed announcement, the market reaction is an expectation of continued short rate rises, so we should be able to benefit from that. And as some of the coupons reset, but longer term, you know, we will get to a point of peak rates and would expect those forward expectations to begin to drop.
Gabriel DeShane
Right, OK. I really just want to know if it makes any change and if you're making any allocation decisions, but if not. Thanks, that's it.
Fullscope
No, no, no, no big allocation decisions. where it changes, Gabriel.
Gabriel
Your next question comes from Limar Prasad with Cormark Securities. Your line is open.
Limar Prasad
Thanks. I just want to come back to DentiQuest. Now that you're a couple of months into having it under Sun Life, I'm wondering if 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? And I'm wondering if you could size that up for us.
Dan
Yeah, I can make some qualitative comments on that. You know, so, of course, DentaQuest is primarily focused on the government programs business. in dental, which is an area that we were not in before, so there's not a big overlap there. But where there very possibly can be revenue synergies is as we put the commercial businesses together and really charge up the legacy Sun Life and even Assurant commercial business with the capabilities that come from the much larger at-scale DentaQuest business. So you're right that we didn't put a lot in our projections around that. That would potentially be upside for us. That'll emerge 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 that's great because that's one of our highest margin, highest ROE products. And 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 DentiQuest and our Fullscope business had collaborated together to offer a broader array of products to a potential partner. So, you know, to your point, we definitely see opportunity and upside there. And we'll obviously have more to say about that as those things emerge.
Fullscope
Great. Thank you.
Gabriel
Your next question comes from Paul Holden with CIBC. Your line is open.
Paul Holden
Thanks. Good morning. I just want to quickly go back to the discussion on SLC asset management and 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's certain components associated with the future buyout that are exceeding your prior expectations and assumptions. So what exactly is it that's exceeding your prior assumptions? If I'm correct.
Kevin Morrissey
Good morning, Paul. It's me. Yeah, good morning, Paul. It's Manjit. So as we said, the liability is out into the future. So one of the things we have to try to do is to think about what the, and it's largely driven by EBITDA as well. So we have to try to project what the EBITDA will be doing. And so we run some scenarios as to what that number would look like in 2025 and 2026. Obviously, as we get closer to that timeline, we can narrow those scenarios because we have more line of sight. So That's what you're sort of seeing this quarter is that we were able to narrow those range of outcomes and that resulted in the higher liability. Okay.
Paul Holden
And when you say narrowing, I understand narrowing of the range, but is maybe the average of that range also moving higher?
Kevin Morrissey
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. But remember the target that we said investor day was a base number. And so, No, that base number is different than what the average that we're using for the liability.
Bitton
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 SLC businesses.
Paul Holden
Totally, totally get that. I guess I'm just trying to understand what is it that's transpiring that's exceeding your initial expectations. And, you know, Manjit gave some details around EBITDA and maybe drill down. Is it, you know, asset growth and flows have exceeded expectations? Is it margins are exceeding expectations or they're other factors. I think that's kind of what I'm trying to understand.
Bitton
You know, it's Kevin, I was CFO at the time. And you know, 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's going to be in 25 and 26.
Kevin
This is Steve Peacher. Maybe I can 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 performance strong? Do you have the right products? And that will manifest itself in higher AUM. So if you look at our two AUM measures, AUM and then fee-earning AUM, both are growing at pretty good rates. 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, you know, to some extent, 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, you know, a liability every quarter. But the fundamental view is that, you know, we feel pretty good about the momentum we have, and then we feel good about that continuing over the next few years, which will It will drive our ultimate payout in these deals.
Paul Holden
Okay, that's helpful. Thank you. And then one quick follow-up, and I guess this is for Dan. You mentioned inflation tailwinds behind pricing and I think stop-loss and group benefits. Just wondering if you can give any more sort of color or flavor around your view on the upcoming renewal
Dan
Cycle I imagine based on the commentary you said that it looks strong, but any any further thoughts there would be appreciated Yeah, sure, and you know we're 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 first date you know and we're also you know in the same season for the group and dental businesses as well and What I would say is that, you know, as always, the market is quite competitive and we always have, you know, some competitors who are perhaps being overly aggressive. We will always tilt towards margins versus sales volumes. So that will play out in, you know, over the next several weeks, you know, especially in the stop loss business. No question there's a little bit of pressure there right now. At the same time, you know, there are inflationary pressures, and then in the group business especially, the impact of COVID mortality is causing all participants to need to raise their prices appropriately. So we have, you know, a couple of counterbalancing forces there, definitely some inflationary and experience-related price increases and a significantly competitive environment.
Gabriel
That's great.
Paul Holden
Appreciate it. Thank you.
Gabriel
Your next question comes from Darko Mihalic with RBC Capital Markets. Your line is open.
Operator
Hi, thank you. Good morning, everyone. And I apologize if this has been asked. I had some difficulties with the phone. So the first question is with respect to Asia. It does look like sales are on fire in Vietnam, which is great. But at the same time, we had some policyholder updates there, some adverse lapse. 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?
spk00
Thank you very much for your question, Ingrid Johnson. We are very excited about Vietnam and the opportunity. And we're seeing a twofold in both The bank assurance relationships with TP Bank and ACV, as well as agency, as we attract very quality agents that we're already seeing uplift on sales. So that is a positive momentum that we should expect, but clearly off a low base, so the percentages would meet over time. On the bank assurance, these are early bank assurance relationships, and we would have observed some initial changes sales relative to bank products that we needed to change as we experienced some lapse negatives. And that's what we've corrected this quarter. So going forward, we should expect a more positive outcome as we've shifted to understand more relevant client segments that are appropriate for the products that we sell and reduce the mix of insurance sales relative to short-term bank loans.
Operator
Okay, great. That's helpful. So the product hasn't been changed. And my next question is for Manjit, maybe Kevin Morrissey. You guys provided a very helpful update in May on IFRS 17. And the one thing that, you know, I haven't seen anything in an EVA work this quarter, so I just wanted to confirm that nothing's really changed since then. You've probably got a better understanding of how things look under IFRS 17. So just wanted to confirm that when we think about forward numbers for 2023 under IFRS 17, we should still expect positive underlying net income growth off of 2022. Is that 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?
Kevin Morrissey
I'll start, then Kevin can chime in as well. So overall, there's 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, and we're continuing to do our dual runs this quarter. You know, the underlying earnings, just like they are in our IFRS 4, take into account 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. I don't know, Kevin, if you wanted to add anything.
Kevin
Yeah, 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 quarters. We're into our third one now. I'd say it's quite good news in that it's just confirming the information and deepening our understanding of the business, but we aren't seeing any changes, so I think that's the good news is it's not changing any fundamental messages from the update we gave in May.
Operator
Okay, great. Thank you very much for that confirmation.
Gabriel
Your next question comes from Nigel D'Souza with Veritas Investment Research. Your line is open.
Nigel D'Souza
Thank you. Good morning. I wanted to follow up on the debt side. You've had two sizable redemptions last quarter and this quarter, and those are of lower coupon-yielding debt. So just trying to get a sense of how that could impact The interest on debt component of earnings on surplus going forward, you know, that component is higher quarter over quarter, it's higher year over year. Should we expect that to trend upwards in a higher rate environment and, I guess, place pressure on earnings on surplus going forward?
Kevin Morrissey
Good morning, Nigel Smanjit. So, the increase in the debt cost is also related to the fact that we closed DentaQuest last quarter. So, you had the debt that we issued for DentaQuest. So that's showing up there. And then we also did an early issuance of the sub-debt that's maturing in November. So those are the two components that contributed to the higher debt costs and earnings and surplus that you're seeing.
Nigel D'Souza
Any comments on that component going forward? Should that continue to trend higher or is it stabilized at this point?
Kevin Morrissey
Well, we're going to see, as I mentioned in my prepared remarks, we're 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, you're going to see some changes in that number as well.
Nigel D'Souza
Okay, great. And my second and last question was on the ACMA side. I noticed that you had a favorable impact related to mortality, particularly in UK and group retirements. Just trying to get a sense of, you know, is there down the line an impact that might be unfavorable to mortality driven by COVID? So far we've only seen unfavorable impacts drop in experience. Any sense of when that could show up on the actual liability side?
Kevin
Thanks for the question, Nigel. This is Kevin Morrissey. So you're right, we did see some very favorable impacts from asthma and mortality, both in Canada and in the U.K., And that was unpaled annuity business, but it was not related to COVID. So I do want to emphasize the fact that we did get some favorable experience going through COVID, but the update that we made to the actual assumptions did not include that. There was no significant impact from that. And longer term on other businesses, I'd say we're still observing and we'll see what the future will hold, but we have, I'd say, kind of a neutral expectation. As we've seen on the life insurance business, On some of the longer-term businesses, it's been fairly benign, and on some of the businesses where it's been more severe, it's in a shorter pricing valuation cycle like the group business.
Nigel D'Souza
I appreciate that. Thank you.
Gabriel
We have no further questions at this time, and I will turn things to Mr. Bitton for closing remarks.
Bitton
today's call. A replay of the call will be available on the investor relations section of our website. Thank you and have a good day.
Gabriel DeShane
The conference will begin shortly. To raise your hand during Q&A, you can dial star 11.
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