Sun Life Financial Inc.

Good morning and welcome to the Sun Life Financial Q3 2024 conference call. My name is Gaylene and I will be your conference operator today. All the lines have been placed on mute to prevent any background noise and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. To join the question queue, you may press star then 1 on your telephone keypad. Your host for today's call is David Garg, Senior Vice President, Capital Management and Investor Relations. Please go ahead Mr.

Garg. Thank you and good morning everyone. Welcome to Sun Life's earnings call for the third quarter of 2024. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at SunLife.com. We will begin today's call with opening remarks from Kevin Strain, President and Chief Executive Officer. Following Kevin, Tim Deacon, 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 are also available to answer your questions this morning. Turning to slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS 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 David and good morning everyone. Turning to slide 4, we had a strong quarter for profitability, for financial strength and for growth. Our EPS was $1.76, up 11% ahead of our medium-term financial objective of 8-10%. Both underlying and reported earnings exceeded $1 billion, showcasing the power of our divisorized business platform, the strength of our client impact strategy and our focus on execution. We maintained a strong capital position, reflecting our financial discipline and capital-light businesses. Underlying ROE for the quarter of .9% was in line with our medium-term financial objective, while our LICAT ratio at SLF remained strong at 152%. We announced an increase to our quarterly common share dividend, consistent with our We also bought back $146 million of common shares as part of our share buyback program. The business continues to produce capital and cash consistent with our objectives, and both the dividend increase and the share buybacks demonstrate our strong capital generation and our commitment to return capital to our shareholders. We achieved solid growth across all business groups, driven by Canada and U.S. Group Health and Protection Sales, up 19%, individual protection sales, up 9% and higher fee income and asset management, driven by higher AUM. Our AUM reached an all-time high, surpassing $1.5 trillion, reflecting both strong equity markets and the continued strength of our asset management capabilities. At $1.5 trillion, we are Canada's largest asset manager based on AUM. Turning to slide five, our success continues to be driven by our winning strategy, which is driven by our purpose of helping clients achieve lifetime financial security and live healthier lives. We continue to focus on positioning ourselves in high growth spaces and delivering for our clients. As such, we have sharpened our focus on our four strategic imperatives to include leverage our asset management capabilities and extend our wealth presence, accelerate our momentum and, Asia, deepen our impact along our client health journey and operate like a digital company. Turning to slide six, we share some of our key highlights and progress from this last quarter. Starting with our focus on asset and wealth management, we realized solid earnings momentum stemming from higher fee income in MFS and SOC management. MFS delivered strong investment performance during the quarter and AUM returned to its highest level since Q1 2022. While outflow challenges remain, we are confident in the long-term strategy of MFS and the actions they are taking to address these headwinds, including offering a diverse range of investment products to meet evolving client needs. This quarter, MFS achieved strong momentum in separate managed accounts, which -to-date were up 40% relative to the same period last year. MFS also experienced growth and fixed income on strong investment performance, which contributed to steady AUM growth. Finally, MFS will be launching five actively managed ETFs on December 5. In SOC management, fee-related earnings were up 6% -over-year on higher AUM driven by strong capital raising. This was SOC's highest capital raising quarter since Q1 2021. We also acquired the remaining 20% interest in infrared capital partners, our global infrastructure investment manager. Since our initial majority stake acquisition in 2020, infrared has broadened SOC management's suite of alternative investment solutions while also creating the opportunity for infrared to access North American investors through our distribution networks. We are also delivering on our purpose of helping clients achieve lifetime venture security through offering innovative wealth solutions. In our Canadian Group Retirement Services business, we are helping clients with their and have launched My Retirement Income, an innovative first for Canadians that offers retirees a reliable source of income while maintaining flexibility and the potential for continued investment growth. This fully automated solution will help ease the transition from saving during working years to drawing income in retirement. We also achieved record wealth earnings in Asia during the quarter driven by solid fund performance in India and our Hong Kong MPF business. And we also realized strong protection results in Asia. Individual protection sales were up 19% year over year driven by higher sales in Hong Kong, India and Indonesia. In Hong Kong, we observed growth across all channels including all time high agency sales and strong contributions from our bank insurance partnership with Daxing Bank. In India, we continue to execute well across our distribution channels. We also continue to see strong sales momentum in Indonesia where we are preparing to launch the next stage of our partnership with CNB Niagara on January the 1st. Shifting to health, both Canada and the U.S. delivered strong group benefits earnings driven by improved morbidity experience and strong sales during the quarter. In dental, we saw positive momentum in both Canada and the U.S. In Canada, as the administrator of the Canadian Dental Care Plan, we continue to provide the access to dental care for Canadians in need. To date, we have enrolled 2.7 million Canadians onto the plan and processed 2 million claims. In the U.S., our plan to improve dental results is proceeding well. Pricing renegotiations and claims and expense management actions are driving improved results. Membership is growing again and while there is more work ahead, we expect results to continue to improve towards the U.S. $100 million of earnings in 2025 that we discussed last quarter. Further this quarter, we reached a milestone, becoming the largest dental benefits provider in the U.S. with approximately 35 million members. We are well positioned in the subtractive high growth market. Looking at digital, Sun Life was recognized this quarter as a 2024 CIO Award Canada winner for our Sun Life Ask Generative AI Chatbot. An internal Gen. AI Chatbot that supports employees in delivering daily tasks more efficiently. Gen. AI is an important part of our digital transformation and we are committed to innovating and adopting emerging technology. In the Philippines, we implemented a new automated underwriting platform resulting in a 50% increase in state through processing. This platform not only enhances the client experience through faster turnaround times, but it also delivers operating efficiencies. We are implementing this automated underwriting platform across Asia. Finally, underpinning our strong business performance is our exceptional people and culture. This quarter, Sun Life was awarded the Canada Order of Excellence, recognizing our company as a leading employer that consistently prioritizes employee well-being, fosters a positive work culture and achieves excellence in mental health. We are one of two corporations in Canada to have received this honor. Special thanks goes to Jacques, Sun Life Canada's Executive Chair, who has helped elevate our commitment to support the well-being of our people, our clients and Canadians. I'd also like to welcome Jessica Tan, our President of Sun Life Canada. Jessica has extensive global experience in insurance and digital innovation and is widely recognized for her thought leadership and execution across digital transformation and health. She brings unique skills and capabilities to Sun Life, and we are fortunate to benefit from her global experience. With that, I'll turn the call over to Tim, who will walk us through the third quarter financial results in more detail.

Thank you, Kevin. Good morning, everyone. Turning to slide eight, we delivered record results in the third quarter with underlying net income of more than a billion dollars, up 9% year over year. Underlying earnings per share of $1.76 was up 11% year over year, exceeding the high end of our medium-term financial objective. Underlying return on equity of .9% was in line with our medium-term financial objective, supported by strength across our diversified businesses. Wealth and asset management was 42% of Q3 underlying earnings, up 4% over the prior year on higher fee income, primarily from increased asset levels due to higher markets. Group health and protection businesses were 31% of underlying earnings, up 21% year over year. These results reflect strong business growth in Canada and the U.S., higher fee income in Canada, and improved group life mortality in the U.S. Individual protection was 27% of underlying earnings, up 3% year over year, driven by strong business growth in Asia and Canada, partially offset by unfavorable mortality in Asia in the prior year. Total company underlying results included adverse credit impacts of $43 million before tax and net of provision release. The net charge was less than .01% of assets and was isolated to a few names across several sectors. Reported net income for the quarter was $1.348 billion, $332 million above underlying net income. The difference between underlying and net income was driven by an update to the estimated acquisition-related liabilities in SLC management, favorable net market-related impacts, and positive actuarial assumption updates. Favorable market-related impacts were driven by positive net interest rate and equity market impacts. Real estate experience showed improvement this quarter, as total returns were slightly positive but below our long-term expectations of .5% per year. We completed the annual review of actuarial assumptions, or ACMA, which resulted in a modest $36 million benefit to net income and a $95 million reduction in total CSM. Our balance sheet and capital position remained very strong, with the SLF-LiteCat ratio of 152%, up two percentage points from the prior quarter, due to strong organic capital generation, partly offset by debt redemption and share buybacks. Organic capital generation of $693 million this quarter was driven by underlying net income and business CSM. Old-code cash remains robust at $1.2 billion, and our leverage ratio declines sequentially and remains low at 20.4%. New business CSM of $383 million was up 4% over the prior year. Total CSM has now grown to $12.8 billion, up 12% -over-year, representing an increasing source of future profits. Finally, book value per share increased 11% over the prior year and 6% over the previous quarter. This demonstrates our ability to generate strong growth while returning value to our shareholders, with 2 million shares repurchased this quarter under our share buyback program. Turning to our business group performance on slide 10, MFS's underlying net income of $218 million was up 5% -on-year from higher average net assets. Reported net income of $210 million was down 1% -over-year, and the pre-tax net operating margin of .5% was in line with the prior year. AUM of $645 billion U.S. was up 16% over the prior year and up 4% over the prior quarter, driven by market growth partially offset by net outflows. This quarter, outflows of $14 billion U.S. included several large institutional mandate redemptions and retail outflows. Institutional outflows were largely due to portfolio rebalancing, with retail outflows reflected continued preference in the current environment for high-growth tech stocks and shorter-term interest-bearing products. Overall, MFS's long-term investment performance remains strong, with 97% of fund assets ranked in the top half of their respective Morningstar categories for 10-year performance. Fixed income performance was also strong, with 98% of fund assets ranked in the top half of Morningstar on a 10-year basis. Turning to slide 11, SLC management generated underlying net income of $47 million, down 11% -over-year, as higher fee-related earnings were more than offset by a favorable tax adjustment in the prior year, which did not repeat. Fee-related earnings of $72 million were up 6% -on-year on continued growth in fee-earning AUM, driven by capital raising and deployments. Reported net income of $357 million includes the impact of a decrease in the estimated acquisition-related liabilities from recent projections related to the future purchases of the remaining equity ownership in our SLC affiliates. Since acquisition, the net cumulative future liability has grown by over $300 million, reflecting continued earnings growth from our affiliate businesses. Capital raising of $7.1 billion was up $3.9 billion from the prior year, reflecting solid activity at SLC fixed income and BGO. Deployments of $4.6 billion were in line with the prior year, as we saw continued opportunities in SLC fixed income partly offset by slower deployment in BGO. SLC's total AUM of $230 billion was up $11 billion -over-year. Turning to slide 12, Canada delivered solid results with underlying net income of $375 million, up 11% -over-year, on higher fee income and strong insurance business growth, partially offset by credit experience. Reported net income of $382 million included net favorable market-related impacts, partially offset by unfavorable ACMA. Wealth and asset management underlying earnings were down 13% -over-year, as higher fee-related earnings were more than offset by negative credit experience. Canada reported record wealth AUM of $185 billion, which was up 20% -on-year, on market appreciation and positive net flows. Group health and protection underlying earnings were up 26% -over-year on business growth and Sun Life Health and higher fee-based income. Group sales were up 4% -over-year due to higher health sales. Individual protection earnings were up 19% -over-year driven by business growth and higher investment contribution. Individual protection sales were down by 24% -over-year due to lower participating policy sales through our third-party broker channel. Turning to slide 13, Sun Life U.S. underlying net income was $161 million, up 15% from the prior year. This was driven by strong business growth in employee benefits, health and risk solutions, and higher net investment results in IFM. Reported net income of $250 million includes favorable ACMA and net market-related impacts. In group health and protection, earnings were up by 13% -over-year on strong business growth in group benefits and improved group life mortality experience, partially offset by lower results. In dental, we continue to observe the impact of Medicaid redeterminations and the resulting higher average acuity of remaining members, partially offset by pricing updates and claim and expense management actions. Q3 results also included a retroactive premium adjustment back to September 1, 2023, supporting our expectation that states will continue to reflect claims experience when repricing these programs over time. We expect dental results to continue improve as we reprice the Medicaid book, generate new sales, and further execute on productivity initiatives. U.S. group health and protection sales of $219 million were up 22% -over-year, driven by higher dental and employee benefit sales. Individual protection underlying earnings benefited from higher net investment results. Turning to slide 14, Asia's underlying net income of $170 million was up 1% -on-year on a constant currency basis, as higher fee income and business growth were partly offset by mortality experience and the global minimum tax. Reported net income of $32 million includes unfavorable ACMA and market-related impacts. We continue to see strong sales momentum in individual protection, particularly in Hong Kong and India. Asia's strong sales drove new business CSM of $267 million, up 11% over the prior year, and total CSM in Asia increased by 22% -over-year. Overall, we're very pleased with results this quarter, as we delivered on our medium-term financial objectives while maintaining a strong capital position. Our diversified businesses, supported by our purpose-driven culture, continues to position Sun Life for sustained superior growth. As a reminder, on Wednesday, November 13, we're hosting an investor day, where we will share further details and updates on our progress, differentiated strategy, and financial leadership. We look forward to seeing you then. With that, I will now turn the call over to David for the Q&A portion of this call.

Thank you, Tim. To help ensure that all our participants have an opportunity to ask questions this morning, please limit yourself to one or two questions and then re-queue with any additional questions. I will now ask the operator to pull the participants.

Certainly. We'll now begin the question and answer session. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from John Aiken with Jeffreys. Please go ahead.

Good morning. In terms of the, you mentioned the retroactive premiums on dental, is there anything else in the pipeline that may be coming down towards you? And the experience that you had in the quarter, does that change how you expect $100 million to be recognized through 2025?

Thanks, John. This is Dan Fishbein. In terms of the retroactive premium, that was for the past year, so a relatively recent period of time, and it's clearly a reflection that the states understand that the premiums need to be adjusted to reflect the actual emerging experience in the wake of the enrollments after the public health emergency ended. Of course, a retroactive premium is quite an unusual event, and we're not counting on those, but there are other places and other instances where that could occur. In addition to the retroactive premium, we've obviously been focused on proactive premium adjustments, and quite a bit of that has been completed and continues to be effective with each subsequent quarter. In fact, our two largest state contracts have their new prospective premiums effective 9-1 of this year and 10-1, so we'll obviously see a meaningful impact from that starting especially in the fourth quarter. At this point, our efforts are proceeding quite well, our work with the states proceeding well, as well as our own management actions, so we continue to believe that the $100 million for next year is quite possible, is a very reasonable expectation for us.

Thanks, Dan. Just a point of clarification, the retroactive premiums are state-based. Are there any states that haven't made this determination yet, or have you basically received retroactive premiums for last year on all the states that you operate in?

No, generally that's a very unusual event. We do have some risk-sharing arrangements with states that have been in place for many years, but as far as an ad hoc retroactive premium adjustment, that's a quite unusual event, but as I said, there may be some other limited places where that could occur. Of course, most of the focus both by the states and us, as well as the health plans we work on, is on prospective premiums. Understood.

Thanks, Dan. I'll read to you.

The next question is from Thomas McKinnon with BMO Capital. Please go ahead.

Yeah, thanks. Morning. The question just with respect to the credit, it seemed to be a little bit elevated in the quarter. If you can elaborate on what was driving that, it may have been a private loan in Canada. Maybe just talk a little bit about how that might be secured, what that relates to, kind of yields you've been getting on that. Is it generally idiosyncratic, or should we, is it indicative of something else? And then I have a follow-up. Thanks.

Thank you, Tom. It's Randy Brown. Let me just start sort of high level, if I could, for a minute. I think when you look at credit performance, you have to think over the longer term, given the episodic nature of credit hits. So over the long term, our credit losses, which are a function of both impairments, net upgrades and downgrades, and ECL, has been lower than estimates built into liabilities. So this pattern, over many years and quarters, has resulted in in losses that are lower than our expected credit results. And every now and then, you get a credit loss spike, so individual borrowers that run into trouble. So they tend to be very lumpy, and any one credit impairment, given the size of our book, can have a perceived outsize impact in a quarter. So with that said, the impairments this quarter are limited to a few credits that had specific challenges. And yes, you're right to point out that it hit Canada more than other geographies in this case. So these unique challenges are factored into the release. We do have a large fixed income portfolio, over $140 billion and over 3,000 unique credits. Very well diversified, both by sector and geography. And so within that, you will see these periodic losses. So yes, this one happened to be the bigger of the several. We're in the private fixed income book, which we've talked about in the past. Again, a big book, highly diversified, you know, covenants, collateral protection, well rated, and offers both diversification and incremental yield. So it's a sector that's performed quite well for us. And in the context of that, this credit experience is relatively benign.

Okay. And maybe just as a follow up then, we have 152 Lycat here. That looks pretty good. You're generating capital. Certainly, if you add back the dividend, it's over 100% of your underlying earnings. Your leverage is, you know, pretty low at 20.4%. You've accelerated some of the share buyback, but a high class problem here to have with this kind of capital position and generating so much excess organic capital. Any thoughts as to what to do with that? You know, investing in the businesses, buying back stock, the dividend increase, you maybe would have thought it would have been higher than the bottom end of your medium term targets. So any comments you can share with us there? Thanks.

Tom, it's Kevin. And as you know, the business is generating capital and cash on a strong basis. And it's as we expect it to generate capital and cash and our priorities for deploying cash and capital remain largely as they have been for a long time. First, we look at funding organic growth and funding our dividend increases. As you know, we target a dividend in the 40 to 50% payout range based on underlying earnings. And we think that that returns the right amount of cash to shareholders and capital to shareholders. Then our next focus line is M&A where we can add either scale or capabilities to businesses that need that. And as we've discussed before, we have pricing discipline around that where we look at M&A that can support our medium term objectives and can help us with all three of our medium term objectives, earnings growth, ROE and also cash flow. And finally, then when we have capital and cash that's in excess of our organic growth needs, our dividend and our M&A needs, as we look at our M&A pipeline, we return that cash back to our shareholders. And we've been doing that through the buyback program. So our priorities haven't changed on that front. And we continue to watch that. We're in a really strong position and we'll continue to deploy capital against all of those things.

Okay,

thanks.

Coordinator The next question is from Mene Gromen with Scotiabank. Please go ahead.

Mene Gromen Hi, good morning. Question on expenses. You're targeting 200 million in efficiencies by 26 on the back of the restructuring you announced last quarter. Just wondering how you're tracking the percentage achieved as of the end of Q3? And then how should we think about expenses for Q4 overall, specifically?

Thanks. Tim Deakin Hi, Mene. Thanks. It's Tim Deakin. I would be happy to respond to that question. We were quite pleased with the progress that we've been making in our restructuring program that we announced last quarter. So this year, we're on track to deliver about 40% of the savings that we had targeted. And then we're also on track for delivering the remaining savings through 2025 and into 2026. So you can expect about 80% of the savings will be realized by the end of next year. Most of the savings are going to come across all of our business lines, and particularly in the U.S. and Canada in 2024. Those were some of the business areas that had some of the earlier impacts and opportunities. And when you think about our overall expenses, this program is really designed to help ensure we achieve the higher end of our EPS growth target. So this is really underpinning the results that you're seeing both this quarter and would expect going forward. I would add that there is always some volatility in quarter to quarter expenses, you know, mostly in the corporate segment and other areas just from timing of initiatives. And in the fourth quarter, we do updates to our overall incentive comp as an example, just based on how the total year-end results reflect. So you can get some volatility from quarter to quarter, but overall very pleased with the progress that we're making and the discipline that we're showing.

Thanks, Tim. I'm just trying to better understand how much sort of efficiency should be expected for Q4 specifically. Are you able to tell us, you know, how far we are along as of the end of Q3 in terms of gauging? Like, I'm trying to figure out the cadence here. Is there a bigger bump in efficiency that is expected in Q4 versus Q3? It's hard to tell looking at the disclosure itself. You can appreciate it.

Sure. So the 40% that I referenced, that is for total 2024. There was very limited impact last quarter because we just announced it. We had some this quarter, but the rest, the bulk of that 40% will occur in the fourth quarter.

Great. Thank you.

The next question is from Gabriel Deshane with National Bank Financial. Please go ahead.

Good morning. A couple of quick number questions and then something on SLC. The retroactive premium thing, you said it's unusual. How big of a number was that? And is this something you've already collected or you're just kind of accounting for it?

Yeah, thank you. This is Dan. You know, we're not going to disclose the exact amount of each premium in a contract, but it was meaningful in the quarter. And it is an adjustment to prior premiums that we entered in as an accounting adjustment in the quarter. I don't believe we've yet received the payment, but we have a contract that indicates we will receive that payment.

Okay. Stop loss experience. I just want to get a sense of how that has trended for you guys because I've seen a, I've noticed a few of your peers have had some issues and probably were too aggressive in selling the product the past few years. And just wondering if you're relatively shielded from that trend.

Yeah. You know, I'll talk about our experience, not so much competitors, but as we've talked about over the past few years during COVID, there was significantly lower healthcare utilization, particularly of the kinds of claims that would impact stop loss. However, that utilization, especially over the past year, has been recovering back to pre-COVID norms. We understood that. We understood that there was some uniqueness, some aberration in the very low utilization and eventually it would recover as indeed it has. So our pricing has reflected an expectation of normalized utilization as opposed to aggressively pricing to reflect a temporary reduction in utilization. We've always been a very conservative pricer. We work with high quality brokers who appreciate that. They appreciate the ability and the expertise that we bring, the great people that we bring to the table and the products and services. So while no one is completely immune from an underwriting cycle, our history has been and continues to be a responsible approach to pricing. And indeed our pricing and our loss ratios remain, our loss ratios remain at or below what we set in our pricing targets. So even though the loss ratio has risen compared to the very, very low levels we were experiencing, we are still achieving our targets and our margins.

Okay, great. And then the wrap up on SLC here, your underlying income, you know, if I annualize it, you're at 160. Can you remind me what your target is? I don't have it written down anywhere. And then I guess the accounting gain there, the 300 million plus gain related to lower payments to SLC minority owners. What should I take away from that? That, you know, when you struck these deals, set a price that was in part contingent on future sales or AUM growth at some, some or maybe one, I don't know, are falling short. So you're, I mean, it's good to get a gain, but the growth isn't coming in as expected.

Hi, Gabriel, it's Steve Pichur. Maybe I can take that and I can tag team on the accounting question with Tim. I think your first part of your question was on kind of the run rate earnings. You know, you underlined that income this quarter was 47 million. And I would say today that's kind of right in the range of what I would consider a run rate. You know, the core of our business, which is management fees is pretty stable and has been in an upward trend because AUM has continued to grow. But on any given quarter, there are some few things that can move around results. For example, we get catch up fees. If we have a fun closing, those can move around quarter, quarter performance fees, seed income. There's some seasonality. So, you know, those, those things that can vary kind of offset each other this quarter. You asked about our target. The target that we've got out there for from investor day a number of years ago for 25 was 235 million of underlying that income. And we think we're trending toward that. So, hopefully that addresses your first question. It does. If you'd like, I can take a cut at the second part of the question. And then can you correct anything I don't say correctly? You know, what I would say is that our liable, we have to book a liability, of course, for our, for what we owe on the put call payments. And we've got three entities left with put, with back end payments, BGO Crescent, which are in early 26 and then AEM, which is in early 28. And while those, those vary slightly there, those back end payments are basically structured in a similar manner. And that is the amount we pay as a function of a formula. And the formula is based on an agreed upon multiple multiplied by the earnings figure in the previous two 12 month periods prior to the put call date. So, for example, in an AEM, which is in 28, we would take that earnings measure in 26 and 27, average it, and then put an agreed upon multiple on that. That gives us the enterprise value. And we'd pay 49% of that because we'd be buying 49% of the equity. So when we, as we try to estimate what that liability is going to be, we have to predict, and we do this on an ongoing basis, predict two things, the magnitude of those earnings, but also the timing of those earnings, because earnings that hit in that, for example, in the example I gave, the earnings that hit in 26 and 27 would have an impact on the put call payment for AEM. Earnings that actually hit in 28 wouldn't. So it's not just magnitude, it's also timing. And if you look at the adjustment this quarter, it's really a function of moving out the timing of those expected earnings a bit as opposed to the magnitude.

Thank God for transcripts. But is it something that we can conclude that, you know, you're saying the timing is pushed back on profit, so something's trending behind schedule or expectations, or is that not a logical conclusion?

Well, I think that, you know, if you think about, for example, one of the impacts this quarter is that, you know, we're, one of our big, most important strategies is to move, get our alternative strategy sold into the retail marketplace. That is, if you read any research report, that's a mega trend. We're just, we're in the first inning of that. We were confident in our ability to do that because we got a broad range of alternative strategies. We bought AEM, which is a national wholesaling platform in the U.S. We've got a partnership with the Scotia Bank in Canada, but we're at the very beginning of that. So as we try to predict years from now, how will that AUM flow when the earnings off that AUM? There's a lot of uncertainty around that. So as we start to gain experience, we're adjusting that, but you can appreciate the difficulty in projecting, you know, exactly when AUM is going to come in three and four, five years from

now. All right. Well, that's very helpful and I will go over the transcript because you have a very thorough response. Thanks. And Gabe,

this is Tim. I might just supplement to everything that Steve said, just to summarize overall, that this is really timing related. So the liability value that was updated, that only goes to the remaining purchase date. So any of the cash flows that come after that are all to the benefit of Sun Life. And, you know, just to add, we've written up these liabilities by over 600 million since the initial acquisition. So 300 on a net basis after the end of Q3. And all of that was charges to income. So you can see the liability valuation is really sensitive to the timing of these projected results. But overall, that cumulative 300 million increase reflects the positive growth in our AUM, the fundraising and deployment that we've done since the initial acquisition of these businesses. So we're very confident in long-term value. It's just the timing of when the actual final payment occurs.

All right. Cool. Have a good day.

The next question is from Alex Scott with Barclays. Please go ahead.

Hey, good morning. Thanks for taking the question. I have another one on stop loss for you. We heard a peer today actually say that they were going to take 100% the hardest markets we've seen in stop loss for a long, long time. You all seem to be much more price adequate than where you sit today. How much of a growth opportunity could that be? How much would you be willing to lean into a business like this where pricing might look a lot better for you next year? But it is still a cyclical business. I'm just trying to gauge appetite. Yeah.

Thank you. This is Dan. Great question. We tend not to lean into those dips in the market. No question that pricing is going to harden in the near future. And some of our competitors, as you noted, very likely have to do some significant pricing, take significant pricing action to correct their books of business. That will certainly make the market more favorable, especially for someone like us who is well priced at the moment and doesn't have that issue. However, we don't typically discount our pricing. Our pricing is set to be appropriate for the business that we write and the targets that we have and the brokers that we work with understand that and generally appreciate that. So while it may be somewhat of an opportunity as the market hardens, you shouldn't expect us to go and acquire market share.

Got it. Okay. Maybe switching over to MFS. I mean, as I look to the results, one of the places it continues to stand out is just the outflows and institutional. And I heard the commentary on that from Nicole, but it was wondering if you just provide more color on what to expect from that over the next several quarters as we think through 2025. I mean, will we see those outflows temper down? Was it more, you know, temporary pressure from specific mandates or is there ongoing pressure there?

Yeah. Good morning, Alex. Mike Robert. Yeah, I think either the retail flows were very similar to what we've talked about prior. And it's, as Tim mentioned, the assets sitting in cash, which as central banks begin to lower rates, we and our partners expect to get better retail net flows. On the institutional side, the last couple of quarters have been impacted by a strategy that is underweight MAG7. And we've seen clients and they're both moving passive as well as active alternatives. We would expect that to moderate. Obviously, we don't know what the next couple quarters look like. Many times you get them within the quarter. You get redemptions and you see them redeem within quarters. So we would expect those to moderate and improve from here. And what I'd say is, as we look into next year, and I've got Ted Maloney here as well, he can talk about, is we are seeing some momentum in fixed income institutionally as well as retail. And also, as Kevin mentioned, the launch of active ETFs. So I'll let Ted comment on some of the things we're working on as we move into next year.

Sure. Good morning. Just real quickly. Where we have performance-related flow pressure, as Mike mentioned, it's in actually a way, we're seeing some of the benchmarks and where we're underweight them. So our view on that will be dependent on what happens to MAG7 as well as how we manage risk around it. But taking a step back, as Mike referenced, we've got very diversified business across the full spectrum of public equity in fixed income, where performance is measured in most timeframes is actually strong across the board, notably in fixed income, which is where we do see the most meaningful medium and long-term growth opportunities. So we certainly are aware of the near-term challenges, both in terms of performance-related challenges here as well as industry exogenous flow pressures, but we're confident in resolving those as well as all the growth opportunities we have. And as Mike referenced, the launch of the ETFs in a couple of weeks, we think is both an offensive opportunity and a defensive opportunity, and we're excited about being able to provide our clients with our investment solutions in whatever package works best for them. And we think that as we continue to do that and deliver investment results across the cycle, the flows will once again be positive in the future.

Thank you.

The next question is from Doug Young with Desjardins Capital Markets. Please go ahead.

Hi, good morning. Dan, back to you. Just, you know, there's been, I think, expense pressures at the U.S. dental side of your business because of the lower, I think it was talked about being the lower Medicaid membership, but, you know, I think in the presentation package you also say you are the largest U.S. dental provider, you know, with 35 million members. So I'm just trying to kind of square the two, maybe you can talk about what I'm missing there. And then to get to that 300 million next year by U.S. of underlying earnings, like how much of that is being driven on the expense side? And maybe you can kind of add on, just talk about how sales are going with the dental business, both Medicaid and the commercial side.

Sure. In terms of the expenses, you know, what you're looking at there is, you know, a year over year comparison. Of course, we've had a lot of membership loss in the Medicaid business. During that past year, it was about 19.5 percent of the starting members lapsed due to the Medicaid redeterminations. So while we have cut expenses and driven more efficiencies, that hasn't completely kept up with that loss of membership. However, the membership is stabilizing and actually with new sales starting to grow, we continue to have a robust set of initiatives going on to drive more productivity. So we don't really anticipate expenses being a drag on the business and in fact an opportunity to make it more efficient over time. In terms of the improved earnings for next year, certainly our expense initiatives play a role, but it's not a major role. The biggest impact, of course, comes from the pricing actions that are being taken in conjunction with the states, with health plans, and getting the pricing to the right place. Another significant contributor are our claim management actions. These are things around utilization management, claim edits, and other management actions that we can take. And that's certainly a contributing factor. I would say the expense actions are the third most important as opposed to a leading component. As far as sales, sales continue to be robust. As you know, in the government market, they're few and far between, but very large. So sales can be lumpy. But for example, in the quarter, we had our first wins ever in California, which is the largest Medicaid market in the country. We won three Medicaid contracts that are expected to be effective July of 2025. And California is a great opportunity for us in the future for significant further growth. There's also a significant pipeline of other Medicaid opportunities. We continue to see Medicare Advantage as a substantial growth opportunity, and that growth is certainly underway. And then quite a bit of opportunity in commercial. Our sales are up over 40% in the past year. So we continue to see that as a very significant part of our growth trajectory in the future.

And then just a follow up, how much of the pricing repricing has gone through? Is it 50, 60, 80, 90%?

So what's happened so far, and we weight this by premium, and this is of course specific to Medicaid business, is on a weighted basis, 91% of the contracts have been repriced as of October 1st. Now, some of those contracts repriced quite a long time ago, and that was before the full impact of the experience had fully emerged. So we've looked at that and said, okay, if we had gotten the pricing on these contracts that we needed through pricing alone to bring the loss ratios back to target levels, what would we have needed and what has been achieved? And on a weighted basis, that number is 61%. So as of October 1st, 61% of what would have been needed to have full margins in the business has been achieved and is now going forward in the results. So of course, the obvious question would be how do you get the other 39%? And clearly, these contracts will need to go through a second round in some cases of pricing action. The good news is virtually all of them are annual contracts in terms of the pricing. So even this fall and certainly into next year, there will be additional actions that will occur to bring the pricing to full levels. But to your first question, we're also not waiting for the pricing to do all the work. Our management actions, both claim and expense, are playing a role to close that gap as well.

Doug and Dan, Kevin, I wanted to add just one quick thing as a reminder. If you look at the quarter, third quarter is a high quarter from claims experience because there's some seasonality to dental. And I think it's important that we keep that in front of us. And Dan mentioned that two of the bigger contracts were 9-1 and 10-1, right? So if you're looking specifically at the quarter, you need to keep those two things in mind. I just wanted to add that just so that you can see that everybody had that perspective.

Okay. And I just might appreciate that, Kevin. Second question, just imagine in Asia, I think expenses have been running a little bit high over the last little while. Can you talk about where you're investing? And maybe just what I'm trying to understand is to get the momentum in Asia and maybe drive that underlying ROE towards, I think the target has been loosely stated at 15% plus, correct me if I'm wrong, what has to happen to kind of start to get that bottom line, underlying earnings momentum?

Good morning, Doug. So we have been making investments in Asia for the last little while. We're really investing across the board in our brand and talent and technology and digital. And you are in fact seeing the results in our bottom line already. Year to date earnings are up 15% year over year. As Tim sort of said, our sales were up 17% on the protection side and we had a record quarter on the wealth side. So you are seeing the impacts of those investments in our results today,

Doug. What about the ROE? Any comment on that?

Well, the ROE will take time, right? Because you have a big denominator, so you're not going to move that in a quarter over quarter basis. And in fact, you have seen a lift in the ROE a few years ago was at 10%. And now we're kind of trending the 12 to 13%. And we expect to see further progress as we move ahead.

Thank you. The next question is from Mario Mandonca with GD Cowan. Please go ahead.

Good morning. I want to start with the first question. Dan, if you could just help me understand one thing on this retroactive premium. I appreciate you're not going to get into the size, but was it recorded in experience games? Is that the right place in driver earnings to look for?

I may need to ask for help from Tim on that one. I think the answer is yes. Hi,

Mario. It's Tim. Yeah, that's where it will show up.

Okay. So the Delta there, like it went from a loss of 17 million last quarter to a gain of 8 million. Can we use that as a gauge of how the size of the retroactive premium?

No, because the seasonality.

Oh, yep. Sorry, Dan. Well, Tim, yeah, I would say there's three things in there that we need to look at. One is the seasonality. So Q3 is the worst quarter for seasonality in the dental Medicaid business. For a pretty obvious but interesting reason, it's right before school starts. So parents take their kids to the dentist before school starts. Then conversely, Q4 is the best quarter for seasonality. School has begun. It's before the holidays. So that's actually currently a tailwind for us. But the seasonality is one factor. A second factor is we had progress on the rate increases and the claim actions. So there was some underlying improvement in the loss ratio if you normalized for both seasonality and that payment. And then the third item was the payment. So it's the combination of those three. It's not isolated to one thing.

There's no real way to tell. That's good enough. Let me move on to a different type of question. On MFS, for as long as I've been paying attention to this company, it's one of those unique asset managers that does not grow through acquisitions. In the current environment, would you be more open to M&A within MFS to pick up capabilities, distribution, people that might get you to positive flow center? Is that something you'd consider? Is that still completely off the table?

Good morning, Kevin. I'm sorry, Mike. I was going to start on a mic and I'll let you build on it. But I know we're on the same path on this one. If you look at acquisitions in the active asset manager space, they're tough to do and they often don't result in the growth that you would expect. And we have a lot of confidence in MFS's capabilities. I talked about them building out on the fixed income side. We talked about the active ETFs coming out and the DC space. And we've talked in the past that they know how to run assets and their clients understand what they're doing. So it's an area that I look at and I'm really pleased with what we get from MFS in terms of our overall earnings performance, the addition it does to ROE and the cash flow. As you know, we get 90% of their earnings back as cash. So I think those are all important factors. And if you step back and look at MFS, it's part of our broader asset management platform that includes SLC, our wealth management pieces that are an important flow into both MFS and SLC, and then what we're doing in Asia. So it's... Now, Mike, I'll let you add to that, but I think that you and I are quite aligned. Yeah, good morning,

Mario. As Ted mentioned, we still see plenty of opportunity for us to grow, whether that be adding active ETFs to existing capabilities for retail investors in the US, significant opportunity for us. 80% of our assets are in equity strategies institutionally. And the vast majority of the wallet for most institutional clients is fixed income in parts of the world. So we see enormous opportunity for us to scale up that business. The second thing I would say is you can take it from a financial modeling lens and you can make acquisitions make sense on paper. The reality of this, if you take it from the client lens, clients tend to not like their asset manager doing that because it takes focus off managing the asset on behalf of the clients rather than... And on integrating to disparate cultures and businesses. And so we've historically seen where some of these happen that we're the beneficiary of assets because clients move their assets to someone else who's more stable and focusing on running their business, their assets for them. And so I reinforced Kevin's point, we see growth opportunities in many other places and we don't need think that we have to take the risk to do it. And we're better off focusing on existing clients. Yeah, that's a fine answer.

The final thing on ROE, I have a ledger here. I can think of four or five reasons why some of ROE can be higher. I can think of four or five reasons why it might be lower. And I cannot figure out which ledger, which side ledger wins. So maybe the question for Kevin, for Tim, how do you balance those two things? Is this a company that can punch up to like a 19% ROE over time or is 18% sufficiently... I mean, is that good enough?

No, Mario, if you look at it, Kevin, if you look at it, our ROE is driven by the mix of our business and the performance of our businesses. And if you step back and do the math, that's where we come out. And I think we like the mix of our businesses and the resiliency. You've seen it coming through COVID, you've seen it through a bunch of different sort of factors. So we'll talk more a little bit next week on Investor Day about specific things around the businesses and driving those. But the math of it is that the mix of business, the asset management business should add ROE. We see Asia growing ROE over time. US, as Dentequest comes back into earnings, will grow ROE. And Canada is doing a fantastic job on ROE. So we like the mix of our businesses, we like the resiliency, and it does... it gives you a strong ROE result.

Sure, no, totally agree. Thank you.

The next question is from Paul Holden with CIBC. Please go ahead.

All right, thanks for making time for my question. So first one is going back to Asia, negative insurance experience in the quarter, I believe, pointed to mortality. At the same time, I see a positive ACMA update on mortality in Asia. So maybe talk to what happened in the quarter, if it's indicative of trend or not. Thank you.

Well, good morning, Paul Smendit. So I'll talk to the first question that Kevin handled, the ACMA question. So in the quarter, the mortality, largely related to our international high net worth business, that business does see mortality from time to time. It's just the nature of the business.

And Paul, thanks for the question. On the ACMA side for Asia, we did see a positive. The biggest source of that positive in the quarter, we call those related to the Hong Kong refinements. So you can think of these as kind of IFRS 17 post implementation cleanups. We did a review, going back to the implementation of IFRS 17. The review is completed now. It resulted in a number of one-time gains, both in net income and CSM.

Thank you. And then second question is with respect to organic capital generation, a number you kind of just started reporting recently in your Corley slide deck, which we do appreciate. But in each of the last two quarters, it's been significantly higher relative to earnings and that sort of 20 to 30% guidance you've given in the past. Is there something unique to the last two quarters on why that's the case or perhaps maybe that 20 to 30% guidance number needs to be revisited?

Hi, Paul. It's Tim. So you're right. This is a new metric for us. And you're right to point out that our organic generation has really been strong in the last couple of quarters. And it has been above target, really driven by the strong, profitable sales that we've been seeing in Canada and Asia quite consistently. And we're still targeting on a longer-term basis 25 to 35% of the unit because this is after paying our dividends. So that gives us flexibility on the dividend payment and where we are in that dividend yield, as well as other capital deployment that we would seek to make opportunistically. So you're right. It is elevated. That's a good thing because it's shown that we've had strong sales and it shows the earnings power and conversion to cash, ultimately, that the organic capital generation contributes. But over the medium and long term, we think that 25 to 35 is a reasonable guidance range.

Okay,

that's it for me. Thank you.

The next question is from Lamar Prasad with Cormark Securities. Please go ahead.

Yeah, thanks. I know you guys don't want to share the number of this retroactive premium, but just to be clear here, the US $9 million in underlying dental earnings in Q3, is that it in terms, like, are all the benefits recorded this quarter? Are there benefits to underlying earnings in future quarters related to this?

Well, the benefit of the retroactive adjustment itself was in the quarter, but that same state has done two other things. One is the premium increased going forward, and they've also committed to relooking at the adequacy of premium in the second quarter of next year. So it's a state that's being a very good partner, making sure that the premiums match the risk that we're taking on for them.

Lamar, it's Kevin. I just want to reiterate that next year, our goal, our target is $100 million USD, and you can think about it as 25 per quarter if you divide it by four and plus or minus that based on some seasonality and repricing. But that's, if you're looking where to sort of put your marker down, I would put it down around there.

Okay, gotcha. And then just coming back to Michael and then maybe Tim on MFS, but thinking about the evolution of earnings at MFS. So there are actions that you guys are taking to potentially boost the earnings power of MFS perhaps related to the restructuring charges taken last quarter. And then secondly, maybe on the following the commentary of the introduction of some of these active ETF products, how does that impact the margin profile of MFS looking forward?

Hi, this is Mike. I'll take the margin question. And the prior question, I don't know, Tim, if you want to take that. From a margin perspective, both with active ETFs as well as fixed income, with active ETFs, they'll have management fees that are similar to existing vehicles. So there is no impact on profitability. As it pertains to fixed income, while the fee rates are lower on fixed income, the majority of the costs, which would be investment costs and the platform that we've built out, are already embedded in the business. And so frankly, even though asset-based, the base points earned on assets will go down, we actually think profitability is pretty similar and will not have an impact on profitability as we scale that business. And then the mandate size tends to be relatively large. And so both of those things, we do not believe will have an impact on margins.

Yeah, Mike, I think you covered that well. I don't know, Lamar, if there's anything further on that.

Not on that, but maybe you could talk about any actions, like maybe on the expense side at MFS related to the restructuring charges, like anything that you can do there to, you know, kind of boost the earnings power of MFS?

So I think Mike touched on the key areas of growth. You know, the biggest assumption or impact on the earnings is the markets. At, you know, over $640 billion of AUM, that's the most material sensitivity. So as markets continue to recover, that will flow through. The expense base at MFS is highly variable. Over 70% of the expense base varies with the AUM and the fees. So there's good operating leverage in that. And that 40, over 40% operating margin, that's top tier for any public asset manager globally. And so I'm quite proud of the track record that MFS has had on that. And they weren't directly part of the formal restructuring program that we announced last quarter. They prudently manage their expenses from time to time. So it wasn't necessary that that program address MFS.

Appreciate the time.

The next question is from Darko Milić with RBC Capital Markets. Please go ahead.

Hi, thank you. Good morning. Thanks for squeezing me in. And I'll be very quick on this, because I also had questions on the margin at MFS. And I guess my question boils down to the following. You know, I hear you that 70% is variable in terms of cost and 40% is top tier. So is that to say that if we took the AUM here, assumed you sort of get past your challenges and flows, markets still behave very well, and you double the assets under management, you take this thing to $5 trillion, are we still to model this thing with this sort of very recognizable pattern on operating margin, and it doesn't really improve from here? I guess it feels as though it's designed and constructed. And you can look historically at the AUM, the average AUM. And it's a very tight range of where your margin bounces. Is that the way to think of this? If we take this thing double, triple, quadruple it in size, that the margin is always going to sort of sit here at around these levels.

Darko, it's Kevin. We're not modeling double, triple, quadruple inside growth for MFS. So I think if you look at it, yeah, yeah, well, it's I'm not sure it's a perfectly aligned theoretical number, right? If you look at it, we're expecting MFS to roughly grow with the markets. And, you know, they've got some puts and takes in some of the businesses, but they'll roughly behave, as Tim said, along with what the market performance is from an earnings

perspective. Okay, so there isn't really much hope for a significant improvement in the margin?

Well, they're already at the industry leading margin levels, right? And they do a good job of managing that and managing their business and managing their expenses. And as Tim said, their expenses are largely variable. So I think that's the way to think about it.

Perfect. Thanks very much.

The next question is from Thomas McKinnon with BMO Capital. Please go ahead.

Yeah, thanks for taking the follow up. Question on other fee income in Canada. Just like over the last couple of quarters, it's moved up nicely, just even in quarter over quarter. And I assume that maybe you correct me if I'm wrong, this has to do to some extent with ASO fees, perhaps? Are some of those in there? Maybe you can help me with respect to that or what's in that number and what's driving it to be moving up nicely? Thanks.

Yeah, Tom, this is Jacques. There are different components, obviously. The increase in the market to the wealth business increases the fee income. There is also, as you just said, the ASO and the health business. And CDCP is also part of that this quarter. So that's what you're seeing in there.

Okay, so that what we've seen ratchet up nicely just of late is landing on that Canadian dental account. Is that correct? That's definitely helping

as well as the market this quarter.

Yep. Okay, thanks so much.

We have no further questions at this time. I will turn things back over to Mr. Garg.

Thank you, operator. This concludes today's call. A replay of the call will be available on the investor relation section of our website. Thank you and have a great day.

This brings to an end today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.