Good morning, and welcome to the Sun Life Financial Q4 2024 Conference Call. My name is Galeen, and I will be your conference operator today. All lines have been placed on mute to prevent any background noise and the conference is being recorded. The host of the call is Paul Poon, Assistant Vice President, Investor Relations. Please go ahead, Mr. Poon.

Thank you, and good morning, everyone. Welcome to Sun Life's Earnings Call for the Fourth 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, Paul, and good morning, everyone. Turning to Slide 4, Sun Life's Q4 results highlight our continuing commitment to helping our clients achieve lifetime financial security and live healthier lives. Fourth quarter underlying earnings saw good results in Canada, Asia, and Asset Management, offset by lower U.S. results on weaker stop-loss morbidity claims experience. The stop-loss claims experience in the U.S. was driven by higher claims severity, which we have observed across the industry. Reported earnings were down year-over-year from market-driven factors as well as the negative impacts from several one-time items that we don't expect to reoccur. Tim will go through these one-time items in more detail. Wealth sales and asset management gross flows were up 33% on strong distribution execution at MFS and SLC. Strong net flows at SLC were more than offset by the negative net flows of MFS, which were consistent with the continued outflows across the industry. Individual protection sales were up, driven by strong sales in Asia. Group protection sales were down, reflecting the lower number of large cases coming to market in the quarter and our pricing discipline. Group sales are lumpy, and we continue to have strong momentum in our Canadian and U.S. group businesses. We ended the quarter with a strong capital position with a LICAT ratio of 152% at SLF. Given our strong capital position, we will continue to execute on our buybacks under our normal course issuer bid. Moving to Slide 5. Let's look at the Q4 highlights and our progress against our purpose and our strategy. In Asset Management, the fundamentals of our businesses remain strong. SLC Management achieved record capital raising of $10 billion this quarter, bringing our full year total to $24 billion, and net inflows this quarter were over $14 billion. MFS long-term retail fund performance remained strong with 95% of fund assets ranked in the top half of their respective Morningstar categories based on 10-year performance. MFS continues to see solid fixed income net inflows with $1.5 billion this quarter, driven by their distribution strategies and strong fund performance. In December, MFS launched five active ETFs, expanding our diverse range of investment products and saw continued sales momentum with their separate managed accounts. In Asia, we're accelerating our growth momentum. We're realizing value from our high-quality, well-balanced mix of distribution channels across Asia. Our agency channel grew with year-over-year increases in sales and the number of agents, while we continue to strengthen our bancassurance relationships with leading banks across Asia. Individual sales were up, driven by healthy high net worth sales, growth in India bancassurance and direct-to-consumer channels, and robust growth in Hong Kong agency and bancassurance. In our India joint venture, our full-year underlying earnings for insurance and wealth surpassed the $100 million milestone this year, maintaining our strong growth trajectory. In Indonesia, we recently launched our expanded partnership with CIMB Niaga with integrated digital capabilities and co-branding. In Canada and the U.S., we are showing strength in our core health businesses. In Canada, Group Benefits revenue was up 11% compared to the same period in the prior year. In the U.S., we see continued momentum in Group Benefits revenue, up 6% compared to the same period in the prior year. Additionally, our U.S. Dental business is building momentum with stabilization in membership and improving results driven by repricing and claims expense management actions. On the digital front, we're driving impact at scale. Our leading virtual care provider in Canada, Dialogue, now offers virtual care services to more than 3.5 million clients and their families, including primary care and mental health support. This represents over 8 million Canadians, approximately 20% of the Canadian population. Our services are delivered through partnerships with nearly 50,000 employers, insurance companies, and various organizations nationwide. In the Philippines, we launched Advisor Buddy to help approximately 5,000 new advisers to speed up their onboarding journey. The new generative AI tool provides fast and accurate answers to what new advisers can do to start serving clients more effectively. These digital highlights demonstrate our commitment to drive meaningful client impact, efficiency, innovation, and growth through digital leadership. Our exceptional people and culture are reflected in our employee engagement index average score of 88%, which has been above the financial services industry norm for more than five consecutive years. In 2024, Sun Life was certified as a great place to work in all participating markets. This recognition reflects Sun Life's commitment to fostering a high-performing, future-ready, and welcoming environment where our people thrive and are empowered to deliver on our purpose. Turning to Slide 6. We ended 2024 with solid full year results. Underlying net income increased 3% to $3.9 billion, our total assets under management reached a new milestone at $1.54 trillion. In Canada, we achieved record underlying net income of $1.5 billion, up 6% over the prior year, supported by solid results across all businesses. Wealth AUM is up 13% with Defined Benefit Solutions, our pension risk transfer business, achieving record annual sales of $2.5 billion. In the U.S., we grew client revenues to $8.2 billion driven by successful execution of our health strategy. We also saw record underlying earnings and employee benefits. In Asia, we saw a strong growth momentum and achieved underlying net income of more than $700 million, up 17% year-over-year. These are record results driven by strong protection sales. Total Asia CSM grew by 30%, reinforcing our growth trajectory. Our results demonstrate the strength and resilience of our business. We will continue to build upon this strength and remain purpose-driven as we move into the year ahead. With that, I'll turn the call over to Tim, who will walk us through the fourth quarter financial results in more detail.

Thank you, Kevin. Good morning, everyone. Turning to Slide 8. We ended 2024 with results in line with the prior year. Underlying net income of $965 million was modestly down 2% year-over-year, while underlying earnings per share of $1.68 was flat compared to the prior year. Full year underlying net income of $3.9 billion and underlying earnings per share of 6.66% were up 3% and 5% year-over-year, respectively. Q4 2024 and full year underlying return on equity was 16.5% and 17.2% respectively. Underlying ROE was impacted by lower underlying net income and growth in book value, driven primarily by currency impacts. The decline in quarterly underlying results over the prior year were primarily driven by adverse morbidity experience in our U.S. Health and Risk Solutions business due to an increase in claim severity, which has been observed across the industry. Overall, our results continue to benefit from Sun Life's resilient businesses and diversified business model. Wealth and Asset Management underlying earnings were up 11% over the prior year on higher fee income, primarily from increased asset levels, partially offset by credit experience in Canada. Group health and protection underlying earnings were down 27% year-over-year, driven primarily by unfavorable morbidity experience in U.S. medical stop-loss and less favorable morbidity experience in Canada. These impacts were partially offset by solid business growth in Canada. Individual protection underlying net income was up 19% over the prior year, resulting from improved protection experience and higher Asia joint venture contribution. Reported net income for the quarter was $237 million, which was $728 million below underlying net income. The variance between underlying and reported net income included market-related impacts and several one-time items, which we do not expect to recur. First, our reported net income was impacted by lower tax-exempt income on foreign currency assets from the material strengthening of the U.S. dollar compared to the Canadian dollar in the fourth quarter. We are taking actions to mitigate this tax volatility going forward. And second, in Vietnam, we recognized an impairment charge on the intangible asset related to our bancassurance agreements. This charge reflects updates to our outlook reflecting industry and macroeconomic factors in that market. Market related impacts reflected unfavorable net interest rate, equity market impacts and the adverse real estate experience. Real estate returns were flat in the quarter, but below our long-term return assumptions. Organic capital generation remained solid at $350 million this quarter or 36% of underlying net income driven by underlying net income and new business CSM. Our balance sheet and capital position remains strong with an SLF LICAT ratio of 152%, flat from the prior quarter as organic capital generation was offset by the impact of markets and share buybacks. Holdco cash remains robust at $1.4 billion, and our leverage ratio improved sequentially and remains low at 20.1%. Total CSM of $13.4 billion, which is a store of future profits, increased by 13% year-over-year, driven by strong organic CSM growth and currency impacts. New business CSM of $306 million was down 20% year-over-year, driven by changes in sales mix this quarter. Finally, book value per share increased by 11% over the prior year and 2% quarter-over-quarter, demonstrating our ability to generate strong growth while returning value to our shareholders with 3 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 $216 million was up 13% year-over-year from higher average net assets, partly offset by expense growth. Reported net income of $216 million was up 18% year-over-year. Pretax net operating margin of 40.5% improved by 1.1 percentage points over the prior year, driven by higher average net assets. Assets under management of $606 billion was up 1% over the prior year, but down 6% over the prior quarter. The sequential decline in AUM was driven by net outflows and market depreciation. This quarter, outflows of $20 billion included several large institutional mandate redemptions and retail outflows. Institutional outflows included portfolio rebalancing and fund consolidation. Retail outflows, while negative, improved over the prior year and reflected the continued preference of investors for high-growth tech stocks and shorter-term interest-bearing products. Overall, long-term investment performance for MFS remains strong with 95% 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% fund asset strength in the top half of Morningstar on a 10-year basis. Turning to Slide 11. SLC Management generated underlying net income of $59 million, down 16% year-over-year as higher net seed investment income was more than offset by lower fee-related earnings. Fee-related earnings of $79 million were down 14% year-over-year as higher incentive compensation driven by strong fundraising at BGO was more than offset by higher fee earning AUM. Reported net income of $25 million was down 47% over the prior year, reflecting market-related impacts and lower underlying net income. SLC Management achieved record capital raising this quarter with $10.2 billion raised, up $3.1 billion from the prior quarter across all affiliates. Strong capital raising helped drive record net flows of $14.1 billion. Deployments of $6.3 billion was down from the prior year but remained solid as we observed sequential quarterly growth in deployments across all affiliates. SLC's fee earning AUM of $193 billion was up $16 billion year-over-year, reflecting market growth in net deployments. Turning to Slide 12. Canada delivered solid results with underlying net income of $366 million, up 5% year-over-year on higher fee income and strong insurance business growth, partially offset by lower net investment results. Reported income of $253 million included net unfavorable market-related impacts. Wealth and Asset Management underlying earnings were up 10% year-over-year as business growth and higher fee-related earnings were partially offset by negative credit experience. Canada reported record wealth AUM of $189 billion, which was up 13% year-over-year on market appreciation and positive net flows. Group Health and Protection underlying earnings were down 4% year-over-year as business growth was more than offset by less favorable morbidity experience compared to the prior year. Group sales were down 49% year-over-year due to higher large case sales in the prior year. Individual Protection earnings were up 13% year-over-year, reflecting favorable morbidity experience. Individual protection sales were down 17% year-over-year due to lower participating policy sales through the third-party broker channel. Turning to Slide 13. Sun Life's U.S. underlying net income was $115 million, down 39% from the prior year. In Group Health and Protection, underlying earnings were lower by 46% year-over-year driven by unfavorable morbidity experience in medical stop-loss from higher claim severity, which we're observing across the industry. This impact more than offset strong underlying business results in group and improved dental results. In dental, the business benefited from management actions to secure repricing on Medicaid business, generate sales, and deliver efficiencies. We will continue to drive profitability improvements through these levers. U.S. group health and protection sales of $830 million were down 11% year-over-year, driven by lower government dental contracts as fewer opportunities came to market this quarter. Individual protection underlying earnings were in line with the prior year. Reported net loss of $1 million includes negative market-related impacts and a nonrecurring provision in dental. Turning to Slide 14. Asia's underlying net income was strong at $175 million and was up 20% year-over-year on a constant currency basis. Results benefited from improved insurance experience, higher contributions from joint ventures, and higher fee income. Reported net income of $11 million includes the impairment charge related to an intangible asset for bancassurance agreements in Vietnam and market-related impacts. We continue to see strong sales momentum in individual protection in international, India, and Hong Kong. And finally, Asia's total CSM grew to $6 billion, up 30% year-over-year, driven by strong organic CSM growth and currency impacts. And with that, I will pass it back to Kevin to conclude in the prepared remarks for this call.

Thanks, Tim. In closing, our commitment to our purpose, our clients, our people, and our values remain constant and unwavering. We're focused on helping our clients achieve lifetime financial security and live healthier lives. We're confident that Sun Life's balanced and diversified business strategy, as well as our financial strength, will position us to deliver on our medium-term objectives, which we introduced at our last Investor Day. I want to thank all our employees and advisers around the world for their commitment to Sun Life's purpose and for making a positive impact for our clients around the world. I will now turn the call over to the operator for Q&A.

Thank you. Our first question is from Tom MacKinnon with BMO Capital Markets. Please go ahead.

Thank you, and good morning. I have a question regarding the stop loss. Dan, could you provide insights on the loss ratio for the fourth quarter and how it's trending? What are the expectations for price increases you implemented in the fourth quarter and those anticipated going forward? Additionally, could you elaborate on the completeness of these claims, specifically the paid loss ratio compared to the actual loss ratio?

Okay. Tom, it's Dan. So let me take each of those and also give a little bit of context. Obviously, we had a variance in the stop-loss loss ratio in the fourth quarter. There are two aspects to the experience that emerged for 2024 in stop-loss. As we talked about throughout the year, utilization returned to pre-COVID norms earlier in the year. And utilization remained at roughly that level throughout the year. What we saw in the fourth quarter was a change in the severity of stop-loss claims. So just a comment or a reminder about how stop-loss claims emerge. Most of the business is effective and renews each January 1. Stop-loss has a fairly high attachment point. These are very severe medical claims. Attachment points or think of it as a deductible are often $150,000, $250,000, or even $300,000. So by the time a claim accumulates to that level, it does take some time versus when the case was effective. So it's really during the fourth quarter of the year and even the first quarter of the following year when we actually receive most of those claims. We get some insight into those claims throughout the year, but we actually see the details when the claims come in. And what we and others who've reported in the industry saw in the fourth quarter was those claims were meaningfully more severe than had been the case in the past. The impact in the fourth quarter really affects the entire year as opposed to just the events attributable to that quarter. So obviously, we restate the way we think the year is emerging based on the claims as they're coming in. So you saw a spike in the loss ratio in the fourth quarter, but probably the most important loss ratio number to think about and which I'll share is what that resulted in, in terms of a full year loss ratio. The full year loss ratio for Stop Loss in 2024 was 74%. You may recall, we price to about 73%. So it was a little bit higher than our pricing target. Now because of the utilization emergence and other factors, we have been raising our prices. We started to move those price increases up actually in the middle of 2024. You will see and we'll experience significant price increases from the January 1, 2025 actions. Most of the business renews on January 1, 2025, and also there were significant new sales. We achieved about a 14% pricing increase on January 1, 2025. And we also took underwriting actions in terms of the business we renewed versus didn't renew, which we think actually gave us about a 2% favorable result to where we were on those kinds of actions around the same time last year. So with that, Tom, have I answered all your questions? Or do you have a follow-up?

Well, I think the way things are disclosed, you have the expected amount in the PAA and then the policyholder experience picks up something that's different than the expected. If your expected was the 73% and the actual was 74%, I guess we have to look at it for the entire year as opposed to just the quarter. But I guess, how should we be looking at this going forward? In 2023, it looked like your loss ratio was between 65% and 70%. And so I assume then if you price them to 73%, you would have been able to pick up positive policyholder experience in line in 2023. If you're pricing to 73% for 2024, then how should we be thinking about any adverse policyholder experience for 2024 for this line?

Yes. So let's go back a little bit to COVID. During 2020, '21, '22, '23, we experienced extremely favorable utilization. And there are obvious reasons for that. It persisted quite a bit longer than COVID itself because hospitals were understaffed and capacity in the system was lower. So you're correct on the loss ratio in 2023 was around 67% for that year. So contrast that with 74% in 2024. And we've been saying really since 2023 that the utilization would return ultimately to pre-COVID or normalized levels. And indeed, it did. So we'd certainly been expecting for a while some rebound in the loss ratio. So we've been taking pricing action consistent with that throughout while understanding that we would not be able to maintain those extra favorable results that were coming from the unusually low utilization. So you are right also when thinking about 2024, you have to think about it in the context of the year versus the stand-alone quarter because that experience applies to the year. And then moving forward, we've taken additional pricing actions moving into next year. Now obviously, some of this increase in severity was not fully expected. So there's likely to still be some pressure as we move into 2025, but there also were pricing actions, and we will take additional pricing actions. We believe the additional pricing actions we need to take are modest in the range of about another 2%. You may have seen some of our competitors talking about pricing actions they need to take, which are many, many times that.

Sorry, what were the additional pricing actions that you are taking?

So well, first of all, effective January 1, we did achieve a 14% average rate increase. We also took additional underwriting actions, which, as I mentioned before, were worth probably about 2%. And then we do think we need to raise our prices about another 2%, which we are in the process of doing.

Okay. So what's the outlook then for this line for 2025, if we were in 2024 at 74%?

Yes. I'm not sure we're prepared to give a specific loss ratio pick for 2025. We would say we would expect some pressure from severity to persist. We don't think this is a short-term impact that may be the new level of severity that we would see. But we think the order of magnitude of action that we need to take in order to address it is around that 2% incremental price increase.

Is the full year stop loss what we should be focusing on instead of just the fourth-quarter results?

Well, I mean, I wouldn't quite call it catch up, but kind of back to the point I made earlier, we really don't receive most of the claims until the fourth quarter and then some into the first quarter of the following year. So while we certainly get some indications as to what's happening, we also have arrangements with many of our third-party administrator partners to give us claims information about claims that are on their way towards hitting a stop-loss deductible. We don't see the actual claims until they come in, which is mostly, as I said, in the fourth quarter. So while it's not catch up, the results clearly do affect the entire year. Just to put it into perspective, two-thirds of our business is effective on January 1 of each year, and it takes five quarters for us to get to about 90% actual claims experience on that cohort. So right now, what we're really seeing is the results of last January's effective dated business.

Okay. Please go ahead.

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

Hi, good morning. Just a follow-up on that line of questioning. So two-thirds of the book has been repriced as of January 1. So that pricing has an impact on this year of 2025. So there should be margin improvement or restoration on that basis alone, correct?

Yes. It's a little more complicated than that. So I would add two points to that. Some of the experience that we report on in 2024 was actually experienced from 2023. So recall that I said 2023 had a 67% loss ratio, a very favorable year. Now we no longer have the benefit of the 2023 business. The other adjustment I would make to that is we started adjusting pricing in the middle of 2024. So we have taken pricing action on more than two-thirds of the business, but also, as I said, we probably do need to take a little more pricing action.

Okay. So ignoring that 2% of additional pricing action required, just what you've done so far, when should we expect that to be fully reflected in your book?

Well, being that we do need a little bit more price, it would obviously take through next January for us to be fully through that, but there should be meaningful impact even from the pricing actions we took effect of January 1, 2025.

You mentioned the claims process, which typically starts in Q4 and continues into Q1, the current quarter we are in. We might see another uptick in Q1 due to claims for 2024. Please, continue.

No, I was just going to say that most of the claims come in, in fourth quarter and then also in the first quarter of the subsequent year. So yes, there could be some pressure that continues into the first quarter from that.

And the message you're giving us the 14% price increase of 2%, which is lower than what we've heard from peers, is reflective of the pricing discipline that you exercised in prior years, like not assuming that the good times are going to last forever type thing, right?

Yes, exactly. We've been quite transparent about this. For a couple of years, we've emphasized that the low utilization resulting from COVID should not be factored into future expectations, and we based our pricing on the assumption that things would return to normalized levels, which they have. You are right; the loss ratio we are reporting and the necessary price increases are relatively modest compared to what some of our competitors are experiencing.

Sorry, Gabe, it's Kevin. If I step back, I would say that we have been in this business for a long time, and we have the scale and understanding. During the COVID period, we saw that morbidity performed better regarding claims experience. Dan had indicated for some time that it would return, and this quarter it bounced back faster than anticipated due to severity. We will adjust that through pricing, which is possible, but it may take a few quarters to see the results. However, the long-term strategy, our capabilities, scale, and the data we possess position us well moving forward. It is somewhat complex when viewed from a broader perspective because COVID had numerous effects. For instance, the core group benefits business underperformed in some quarters but has been doing really well recently. I want to emphasize that we are confident in our strategy. We believe we have the right scale and pricing discipline, and we were less affected than many of our competitors. Looking at it that way, if you refer to Slide 18, you can see the morbidity results. This data encompasses the whole company, but the U.S. contributes significantly, showcasing the positive outcomes in Q3 and Q4 alongside the negatives this quarter, which are illustrated both post-tax and pre-tax on that slide.

Yes, I understand. I don't want to overreact to this. It's about grasping how everything works, the timing, and the details, similar to the dental redetermination process. There's a bit of a learning curve involved. Anyway, let's move on.

Sorry, Gabe, it's Kevin. If I took a step back, I'd say this is a business we've been in for a long time, and we have scale and understanding. We observed during the COVID period that morbidity performed better in terms of claims experience. Dan had been indicating for some time that this would return, and it happened faster than we anticipated this quarter due to severity. We will adjust pricing accordingly, but it may take a few quarters for that to fully materialize. The long-term strategy of the business, our capabilities, scale, and the data we possess all position us well for the future. It's a bit complex when you consider the various impacts of COVID. For instance, the core group benefits business had some quarters of underperformance, but it's now performing very well. I want to emphasize that we are confident in our strategy, confident that we have the right scale and pricing discipline, and it's evident that we were less affected than many competitors. Looking at it from that angle, if you examine Slide 18, you’ll see the morbidity results. While this data reflects the entire company, the U.S. is a significant part of it, showcasing the positives from Q3 and Q4 and the negatives from this quarter, with both post-tax and pre-tax information on that slide providing some insight.

Yeah, thanks.

The next question is from Meny Grauman with Scotiabank. Please go ahead.

Yeah. Good morning. I think this is for Dan. I'm not sure if you addressed this, but if so maybe I missed it. You've been talking about a target of $100 million underlying earnings for dental for '25. Would you be able to give sort of similar guidance for the group benefits line in terms of where you see that for 2025?

For dental, we have set a specific target due to the unique circumstances from last year related to the end of the public health emergency. Typically, we do not provide specific earnings targets by business line. However, it's important to note that our Group Benefits or Employee Benefits business had its best year ever in 2024. Earnings increased by over 50%, and the margin exceeded our long-term target of over 6%. This business is performing exceptionally well, showing strong organic growth, impressive loss ratio results, and good expense coverage progress as it expands. It has considerable momentum, and we anticipate positive results to persist in this segment, similar to what we saw in the fourth quarter.

Okay. Just another question on SLC this time. I noticed no discussion about capital raising and coming from Crescent and BGO Crescent makes a lot of sense to me just given trends. BGO stood out to me. And so I just wanted to get a better understanding of what's driving that and how you see the outlook for capital rating specifically in the real estate sleeve of SLP. Again, those counterintuitive just given the pressures that we've been dealing with on the real estate side for a while now. So that's the question.

Yes, this is Steve Peacher. Thank you for the question. You're correct. We had our best fundraising quarter ever at $10.2 billion, spanning all asset classes. The largest portion of that was with Crescent, which benefited from the timing of three fund closings and key fundraises, totaling just over $5 billion, roughly half of the total amount. At BGO, we had a significant closing for their Asia Fund IV, which has been very successful, potentially approaching $4 billion. They completed a large closing during the quarter. Additionally, we secured a sizeable separately managed account in Canada focused on real estate, and we also generated over $1 billion in fixed income wins. Overall, our fundraising was broad-based. In real estate, we are beginning to notice renewed interest. The issues impacting real estate, particularly concerning the office sector, have clouded the market. The inverted yield curve also affected fundraising. For BGO, fundraising was nearly $9 billion in 2022, dropped to $4.2 billion in 2023, but has bounced back to almost $8 billion this year, and we expect this trend to continue. There's increasing demand for core real estate, particularly for our prime Canadian fund, with specific sectors like industrial, cold storage, and data centers seeing interest as well. As office utilization begins to improve, we're recognizing a resurgence in investor demand for real estate.

Okay, great. Thanks for the call.

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

Just Dan, just a few, hopefully, quick ones here just on the medical stop loss. I just want to confirm, I think I know the answer, but 100% of this renews annually. And can you size out the negative morbidity experience. Is it fair to say it's about $50 million in the quarter, and assuming things are rolling through that this should be the worst of it?

Yes. Almost all of the business renews and reprices every year, which is correct. Your estimate on the morbidity loss is very close. As for the worst of it, that's a more complex question. Keep in mind that this quarter reflected our outlook for the full year, particularly for the January 1, 2024 cohort. Therefore, we wouldn't anticipate a similar adjustment happening in a single quarter that would impact the full year's outcomes. However, as I mentioned earlier, there may be some pressure going forward until we can incorporate the additional 2% in pricing that I referred to.

Is there a way you can smooth this out so it doesn't all come in Q4? Is there a better way to smooth it out? I don't know if that's a possibility.

Yes. You're not the first person to ask that question. In a business where you don't fully see the results really for five quarters, a lot of what we do is based on reserving choices. And we do the best we can each quarter to give a very good educated estimate of what's happening with each of the cohorts that we are managing and observing the emerging experience on. So there already is a fair amount of reserving involved in the business as it moves forward. So to some degree, what you are saying is already in there. But obviously, when things happen that you didn't fully anticipate, you have to make the right reserve call each quarter.

Yes, I just think a property and casualty insurance in your reserve footprint, and we always look for positive reserve developments from something like that, but that's just kind of where it was going. And then Dan, on the U.S. dental side, there's a onetime payment for ASO for remediation reimbursement. I mean can you elaborate on what that was?

Yes. Sure. We took a provision in the fourth quarter for onetime payments to reimburse several administrative services-only clients for services that were provided on their behalf during 2024. These were one-time payments for services where we're the administrator, so it's not related to claims incurred by us, and therefore, there's no impact to dental loss ratios or the insurance experience. There was no negative impact to members or providers; rather this was isolated and specific to the self-funded clients themselves. The provision reflects our best estimate of the amount and we are addressing the issue and don't expect it to recur.

I'm trying to understand why the payment was made. I don't believe it affects the loss ratios or anything like that. Can you clarify what it was related to?

Yes. Some of our business is administrative services only, where we are acting as the administrator or where we pay claims on behalf of the sponsor. And we paid some more claims in certain situations than it turns out we should have. So we are correcting that with the clients to make sure that we take care of our clients and put the issue behind us.

Okay, appreciate the color. Thank you.

Next question is from Nick Blue with Evercore. Please go ahead.

The first one is, again, on medical stop loss. Just wondering what's the level of medical cost trend you are building in for the rate increases and less so on the first dollar, but more so where Sun Life comes in? And where do you see that impact your total top-line premium for the year?

Medical trend overall, including for core health insurance and the overall health system, is currently higher than it has been in recent years, and we estimate this rate to be around 8%. This is the core rate. Due to how stop loss operates with high attachment points, there is a leveraging effect, so the effective trend for large claims typically is about double the core rate, resulting in a trend of approximately 16% for our business. This will have a positive impact on our revenue moving forward, which includes an additional 2% we believe we need to incorporate into our pricing to reach that 16%.

Thank you. My follow-up question is about the U.S., where you mentioned some unfavorable trends in disability. Is that related to the recent favorable trends, or do you expect it to return to pre-pandemic levels? What factors led you to decide to pull back on employee benefit sales?

Yes. There was a slight increase in morbidity and disability in the fourth quarter. However, when considering the entire year, the overall experience was quite positive. I consider this more of a quarter-to-quarter fluctuation rather than a significant trend. The experience with disability is not directly tied to medical trends or experiences. Over the years, we have seen continuous improvement in disability outcomes, with fewer individuals applying for disability and more individuals returning to work. We also believe that remote work has contributed to this improvement, as about half of the workforce is in positions that allow for remote work, enabling them to remain employed in ways that weren't feasible previously. Therefore, we are currently experiencing a decline in disability incidence alongside an increase in successful returns to work, indicating a period of improved disability experiences.

Great. Thank you.

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

Good morning, Dan, I'm going to continue with your first question. Just want to understand if there's any common drivers or factors behind those large claims that hit the Q4, and you did mention your answer some other underwriting changes you're making beyond price. So wondering if there is some common factors that you can address in terms of how you're underwriting stock loss beyond price?

Yes. No, this is a great question, and we've been doing a tremendous amount in the way of analytics to understand what the drivers are. And we see three drivers of the increase in severity. One is unfortunately, more advanced cancer cases. And there is a couple of aspects to that. One, we do believe that during COVID as people did not seek routine medical care, including screenings that unfortunately, that means we're now seeing several years later the impact of that with people having been diagnosed later in the course of their illness and the illnesses as a result are somewhat more severe. Also related to that, there are a number of new cancer drugs that are very promising but also very expensive. And we have seen some elevation in the use of those drugs. The second issue is a pretty significant increase in premature birth and neonatal care, which obviously can trigger stop-loss thresholds. There was just a report actually published last week that showed that the number of births in the U.S. rose 4% last year versus the prior year. So there's actually more birth. Also, the age of parents continues to rise, and the use of tools like in vitro fertilization continues to rise. And all of those things contribute to more premature births and neonatal intensive care as well. So that's really the second category. And the third driving factor is hospitals are increasing prices. Now obviously, the core health insurers who are underlying all of this negotiate very hard with hospitals, but we are seeing hospitals being successful recently in raising the cost of inpatient care. Some of that is the post-COVID impact. You probably read a lot of hospitals and large hospital systems are suffering financially, as the federal government subsidies and supports that existed during COVID have worn off. And so one of the ways that they are addressing that and also that they've built back to pre-COVID capacity has been to raise prices. So those are three factors we think are primarily driving the severity, and those factors are likely persistent.

Got it. Thanks. All right. Why don't we give you a break then? I want to ask Tim a question regarding expenses. So earlier in 2024, announced, I think it was $200 million of planned expense savings. Wondering how much of that came through in the quarter or maybe how much has been achieved to date? Where do we see that in the DOE and how much should additional or should be realized in 2025?

Hi, Doug, thanks for your question. We have made significant progress on our expense efficiency program. In the fourth quarter, we reached our goal of 40% efficiency for the full year, resulting in $82 million in savings, slightly surpassing our expectations. One of the challenges we've noted from the start of the program is that due to IFRS 17, it's hard to pinpoint where expenses are recorded as they appear across different categories. In response to your question, nearly 40% of these savings are reflected in net insurance service results, with the majority of the rest appearing in various non-attributable expense lines. Geographically, almost half of these savings originate from the U.S., especially within the dental business, where we have implemented various expense measures. Another 20% comes from Canada, and the remaining 30% is within the corporate segment. As we indicated, most of the savings are concentrated in these areas, with a bit more than half related to FTE reductions that have already taken place, along with some through attrition. Additionally, 20% of the savings will come from automation, which we are anticipating for 2025. We expect to fully realize the $200 million in savings under this program, aiming for 80% of that total by the year's end, and we are on track to meet that expectation. However, tracking these savings across different lines will remain challenging. Please let us know if you would like regular updates on our progress.

Okay. And just last question and just a follow-up to that one. Will that be a net benefit to earnings? Or is this really more a story of finding cost savings to reinvest in investments, whether it is technology or growth initiatives or otherwise?

Yes. It's a bit of both. So we are seeing it come through the bottom line, but we are investing in technology and digital and AI like we covered at our Investor Day. And I think the best way to think about this is this is embedded in our growth objectives in our medium-term objectives. So we really look at the overall earnings growth rate targets by each one of our business groups, and this program is helping to support and underpin those growth rates. And we've been pleased with the progress and expenses continues to be a focus really because we do need to continue to invest in the businesses, and we want to make sure that we are generating positive operating leverage.

All right. Okay. That’s it from me. Thank you.

The next question is from Mario Mendonca with TD Securities. Please go ahead.

Dan, a question for you, but this is nothing to do with stop loss, it's just have to do with Medicaid. There's themes and theories around what a U.S. administration will do to reduce expenses. And there are certain sacred cows out there like Social Security and Medicare. But Medicaid keeps coming up as one of those areas where this new administration may cut expenses. Can you talk about Sun Life's overall exposure to Medicaid, and what would happen if Medicaid roles really do come under pressure over the next couple of years?

Yes, Mario, we have approximately $2 billion in Medicaid business, which is a significant portion of our dental operations. We are pleased to serve this market and have a strong history in it, including the DentaQuest legacy. To understand this better, you might want to look at the proposal recently introduced in the House of Representatives. This proposal is the initial draft of the House reconciliation bill and may not pass in its current form, as it could undergo significant changes. It suggested a roughly 10% cut to Medicaid funding over the next decade. However, this would likely not impact our business significantly because we primarily serve children, who are central to the required Medicaid program. Any cuts that might happen would probably focus on adult coverage, a much smaller segment of our business, and they may come in the form of work requirements for able-bodied adults. In evaluating those requirements, most individuals would likely meet them already. Consequently, these changes would probably have minimal impact on us. While it's difficult to predict the exact outcomes, our business would likely feel only a small effect from the proposed 10% cut. Dental benefits, especially for children, are generally considered to be essential services.

I see. Dental is not the only factor contributing to the $2 billion. Presumably, there are other Medicaid services beyond dental at Sun Life?

No, not in Sun Life; the only participation we have in Medicaid is through the dental benefits.

Okay. That's clear. Now, regarding Q3, your response to questions about stop-loss appeared to be more optimistic, particularly with your comments about Sun Life's conservative pricing. It seems something caught you off guard in the past three months. Was it simply a timing issue concerning when information became available, or was there no way to anticipate this sooner?

Yes. In the third quarter, our assumptions were based on utilization. We observed utilization levels through the claims that come in throughout the year, which helps us gauge the number of claims. Additionally, we receive early data from some of our TPA partners that also indicates utilization. We noticed that utilization returned to pre-COVID norms earlier in the year, which was somewhat surprising. The impact was evident across the industry, as reflected in the earnings reports from our peers in both stop-loss and the broader health insurance market. A significant observation that emerged in the fourth quarter was the severity of the claims. This refers not to the number of claims, but to how severe they were, which is somewhat new in our experience. As I noted, we typically do not see most claims until the fourth quarter of a cohort and some even in the fifth quarter, impacting the first quarter of the following year. Therefore, the severity of claims was the key takeaway for everyone in the fourth quarter.

Yes. I've just been quick to dismiss other companies' experience by saying things like Sun Life's more conservative, Sun Life's better, Sun Life's got the expertise, better relationships presumably, that still true. It's just that things got particularly bad this quarter. I mean is it still an appropriate thing to cite some like the quality of Sun Life's book is better?

We certainly believe that. Our experience and how we managed it set us apart from what some of our competitors are reporting. The severity of illness is not something we can control, as it's affecting the entire market. What we can manage is pricing and underwriting, and our pricing strategy is much more precise than that of our competitors. Some of them assumed that low utilization from COVID would continue, leading to significant rate increases to recover. In contrast, we're discussing more moderate numbers. So, while health care severity is an external factor, we excel in pricing and underwriting compared to the competition.

Thanks, Mario. There are several aspects to consider here, so let me provide some context. Under Canadian tax law, a portion of our investments is not subject to taxation in Canada because they are tax-exempt. These investments support our foreign operations through branches of our Canadian entities. Historically, we've enjoyed a tax benefit from this program since its inception. However, this year we experienced lower tax investment income from foreign currency assets and related foreign exchange swaps, largely due to the significant strengthening of the U.S. dollar against the Canadian dollar. This resulted in an unusual tax loss for us. As I mentioned, we have always had a tax benefit from this program by design. The loss reflected in our reported income is the difference between the anticipated tax benefit, which we include in our underlying net income, and the actual tax loss we incurred this year. We are taking steps to address this issue, aiming to reduce the impact of tax-related foreign exchange fluctuations on our reported income, so you shouldn’t expect this level of volatility going forward.

Okay. Lastly, regarding earnings on surplus. I remember you provided guidance on sensitivity to rate declines. If I look at Slide 20, core investment income has decreased significantly year-over-year. Is that solely due to the impact of the rate cuts? Should we expect a similar response for future rate cuts?

Yes, I think that's a fair description. The decline we observe in core investment income for Q3 is primarily due to lower yields. By the end of Q4, nearly 40% of our surplus holdings were in short-term securities, and we experienced an 80 basis point drop in short-term yields during that quarter alone. Additionally, we had a slightly lower surplus balance. Overall, we also saw lower fair value trading gains through other comprehensive income this quarter. Regarding your outlook comment, if short-term rates remain low, consider this as a new baseline for core investment income in the near term. However, over time, we will aim to reinvest those assets into higher-yielding products. When long-term rates decrease, it will also offer us an opportunity for fair value gains through other comprehensive income.

Okay. Is that 40% typical for the allocation?

No. In the fourth quarter, we experienced significant capital repatriation from our operating entities, which is reflected in our strong cash generation and growing capital. This capital was temporarily held in short-term investments. We typically do not aim to operate at a 40% allocation. The surplus consists of a mix of cash, which we can use as collateral for derivative needs, and a long-term holding that is currently more weighted towards short-term due to the cash inflow. We plan to reinvest this capital, especially when opportunities for yield arise as interest rates change.

Yeah, thanks.

The next question is from Meny Grauman with Scotiabank. Please go ahead.

Yeah. Good morning. I think this is for Dan. I'm not sure if you addressed this, but if so maybe I missed it. You've been talking about a target of $100 million underlying earnings for dental for '25. Would you be able to give sort of similar guidance for the group benefits line in terms of where you see that for 2025?

For dental, we have set a specific target due to the unique circumstances last year surrounding the end of the public health emergency. Typically, we do not provide a specific earnings target by line of business. However, I want to emphasize that our Group Benefits or Employee Benefits business had its best year ever in 2024. Earnings increased by more than 50%, and the margin exceeded our long-term target of over 6%. This business is performing very well, showing strong organic growth, favorable loss ratio results, and good expense coverage improvements as they expand. The business is gaining significant momentum, and we anticipate continued strong results in this segment as seen in the fourth quarter.

Thank you, everyone. In the interest of time, we're going to end the Q&A session now. I will turn it back to Paul for the closing remarks.

Thank you, operator. This concludes 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.