Sun Life Financial Inc Q1 FY2026 Earnings Call

Good morning, and welcome to the Sun Life Financial Q1 2026 Conference Call. My name is Galeen, and I will be your conference operator today. (Operator Instructions) The conference is being recorded. (Operator Instructions) The host of your call today is Natalie Brady, Senior Vice President, Capital Management and Investor Relations. Please go ahead, Ms. Brady.

Thank you, and good morning, everyone. Welcome to Sun Life's Earnings Call for the First Quarter of 2026. 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, Tom Murphy, President of Sun Life Asset Management, will provide an update on our asset management businesses. Following Tom, 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, Natalie, and good morning, everyone. Turning to Slide 5. We delivered solid first quarter top and bottom line results. Underlying net income was $1.05 billion with EPS growth of 4% over first quarter last year and underlying return on equity was 18.6% on path to achieve our medium-term objective of 20%. Reported net income was impacted by market adjustments as well as a few one-time items that Tim will discuss in more detail. Strong protection income results were driven by growth in Canada, Asia and U.S. stop loss. In Sun Life Asset Management, MFS had consistent earnings year-over-year, reflecting market conditions. SLC management results were below our expectations, reflecting the absence of catch-up fees and lower seed income this quarter, which were both strong last year. We expect SLC earnings to rebound solidly over the remainder of 2026. For top line, insurance sales saw significant growth, driven by sales momentum in Asia and continued solid sales in the U.S. Asset Management gross sales remained strong across MFS, SLC, Canada and Asia. MFS U.S. equity outflows increased in the quarter amid the broader industry-wide dynamics impacting the U.S. mutual fund market. We ended the quarter with a strong LICAT ratio of 143% following the completion of the BGO and Crescent acquisitions. This quarter, we announced a 4% increase to our common share dividend to $0.96 per share, and we also announced a renewed normal course issuer bid to repurchase up to 10 million shares, reflecting strong cash flow and a focus on execution across our businesses. Turning to Slide 6. We are making significant progress across our key strategic areas. At SLC, we achieved several significant milestones, including completing the acquisitions of BGO and Crescent, advancing leadership alignment through the launch of our management equity plan and announcing our intention to acquire Bell Partners. We are confident in SLC achieving their medium-term growth targets. Later in the call, Tom Murphy will share a few words on the Sun Life Asset Management platform and the growth opportunities ahead. Staying on asset management, in Canada, growing our wealth businesses is a key focus. Sun Life Global Investments continues to build its ETF platform with the addition of two MFS-powered low-volatility equity strategies. Turning to Asia. We are seeing strong momentum with sales up 49% over last year, exceeding $1 billion in a quarter for the first time ever. Growth was led by Hong Kong, where sales grew 75%, driven by double-digit sales growth across all channels. Indonesia also delivered strong performance on the ongoing strength of our expanded CIMB Niaga partnership. Our relationship with CIMB Niaga goes back 20 years. Together, we continue to innovate and partner to deliver exceptional solutions for our clients in the market. We also saw good sales momentum in high net worth, India, China and Malaysia. CSM in Asia reached $7 billion, up 12% year-over-year, reflecting the quality of our sales growth. In the U.S., we delivered strong sales results. The rebuild and refocus of our U.S. Dental business is progressing well. We are focused on executing against a targeted strategy to increase our share of the commercial dental market to deliver stronger margins and improve profitability over time. Helping members access care and improve health outcomes sits at the core of our U.S. strategy. Guided by this focus, we expanded Sun Life Expert Cancer Review. This service supports members facing a cancer diagnosis with access to objective second opinions, helping them attain the treatment plan best suited for their needs. We continue to advance our digital capabilities across the organization with a focus on delivering improvements in both client experience and business efficiency globally. In Asia, our Hong Kong business expanded their data-driven underwriting, increasing straight-through processing and enabling faster client onboarding. In Malaysia, we deployed an AI-assisted Talkbot, expanding servicing capacity and creating more timely and consistent engagement with clients. In Canada, we are continuing to scale AI across the business with advisers using AI-enabled tools to support client conversations. Our operations employees are leveraging AI to access information more quickly and more than 90% of our developers are using AI to improve efficiency and the speed of delivery. Building on this broader adoption, straight-through underwriting increased to 40% for eligible individual life insurance applications, up more than 50% year-over-year. This reduced average issuance time from 25 days to 11, enables faster policy delivery and improved operational efficiency. These examples demonstrate how digital investments are enhancing client outcomes while enabling more efficient, scalable growth across the businesses. Turning to Slide 7. We delivered solid first quarter results progressing against our medium-term objectives. Underlying earnings per share growth of 4% reflects our solid businesses. Our underlying ROE of 18.6% and dividend payout ratio of 49% are aligned with our medium-term objectives. Our four pillars are well positioned to deliver our medium-term objectives. Canada continues to anchor Sun Life's performance and reinforces our role as a trusted partner to millions of Canadians. Asia is performing strongly, driven by growth in the high net worth and middle class markets and solid execution. The U.S. is focused on scaled capital-light group benefits businesses in a growing and increasingly complex health care market. At Sun Life Asset Management, our scale and broad capabilities enable our resilience to manage across cycles and leverage synergies from our protection businesses. Our purpose continues to guide how we serve our clients, while the strength of our diversified business mix and global capabilities positions us to navigate the current market conditions and geopolitical uncertainties with confidence. Across our businesses, we are making clear progress against our strategic priorities, supported by strong fundamentals and disciplined execution. Looking ahead, we are confident in our ability to continue creating value by executing on our strategy with focus and consistency. With that, I'll turn the call over to Tom, who will walk you through Sun Life Asset Management, what the platform looks like today and where we see opportunities to grow.

Thank you, Kevin. I'm excited to share some updates on the Sun Life Asset Management pillar. As Kevin mentioned, this quarter, we took two major steps forward with SLC. First, we completed the buyouts of BGO and Crescent Capital. Second, we launched our management equity plan with over 300 of our most senior people investing their personal wealth in the future of the business. We see this as a strong statement of intent as it creates alignment between our employees, clients and shareholders. During 2026, SLC will move from a group of related affiliates to a $400 billion singular global asset management platform. As such, this will be a moderate growth year for SLC and there is significant room for growth in the years ahead. We remain committed to our previously communicated medium-term targets. Sun Life Asset Management was established to accelerate the growth of our asset management businesses and specifically to unlock opportunities between our asset management, insurance and wealth businesses. We are starting from a position of real strength with $1.4 trillion in assets across equities, fixed income, real estate, infrastructure and alternative credit. Let me share a few areas that we are working on. For SLC, we are focused on enhancing access to seed capital, the lifeblood of any alternative asset manager. Seed capital is critical as we incubate and launch new funds. We are also pursuing sources of permanent capital, which will create scale benefits for SLC and boost future revenue and earnings. Bringing our pension risk transfer business into Sun Life Asset Management was a deliberate move to source strategic capital for SLC. In return, this allows our pension risk transfer business to better leverage SLC's investment capabilities to enhance their client value proposition and to grow their market share. Turning to MFS. We see significant opportunity to grow alongside Sun Life's wealth businesses. We have room to grow our AUM alongside SLGI and Group Wealth here in Canada, and there are further opportunities to help MFS grow in Asia through our Hong Kong MPF business. Many of the opportunities within our insurance and asset management flywheel can be fueled by both internal and external capital. With this in mind, we are proactively engaging with insurers, reinsurers, pension funds and sovereign wealth funds to create sources of seed and permanent capital and with wealth providers for enhanced distribution opportunities. We also continue to add new investment capabilities. During the quarter, we announced our intention to acquire Bell Partners, which will boost our U.S. multifamily capabilities. While at Crescent, we are investing in new adjacent credit capabilities, which we believe will bring value to clients and boost future earnings. Finally, we are proud of our joint venture with Aditya Birla in India. Today, Aditya Birla Sun Life AMC has $60 billion in AUM. It's growing quickly and has strong margins. We believe the alternatives market in India is at an early stage of development and is primed for future growth. Our combination of global and local resources positions us very well to capture this opportunity. Our $1.4 trillion asset management pillar covers an enviable range of asset classes and is truly global in nature. We are well positioned and excited by the journey that lies ahead. With that, I'll turn the call over to Tim, who will walk us through the first quarter financial results.

Thanks, Tom, and good morning, everyone. Turning to Slide 12. We reported solid underlying net income of $1.05 billion in Q1, consistent with the prior year. Reported net income before notable items this quarter was $775 million, reflecting $220 million of market impacts, primarily related to yield curve movements and equity market and real estate performance below long-term expectations. Total reported net income was $465 million, which includes two previously disclosed items, a $165 million charge related to the completion of the BGO and Crescent acquisitions and a $145 million provision for a previously disclosed proposed legal settlement. Turning to Slide 13. Total insurance sales increased 17% over the prior year to $1.7 billion. Individual insurance sales were very strong, reaching a record $1.2 billion in the quarter, up 32%, with growth largely driven by Asia across multiple markets, led by Hong Kong and Indonesia. Group Insurance sales were $552 million, reflecting continued progress in the U.S. with higher sales across all business segments led by medical stop-loss, commercial dental and the timing of large case sales in Canada. New business CSM grew by 6%, driven by the strong sales growth in Asia. Gross flows were up modestly, driven by higher fundraising from SLC, higher MPF sales in Hong Kong and higher group fund sales in India, tempered by lower volumes in Canada. In Asset Management and Wealth, net flows reflected outflows in the U.S. equity products by retail investors and institutional portfolio rebalancing at MFS. Turning to Slide 14. Sun Life Asset Management underlying net income of $265 million declined 3% year-over-year, largely reflecting the impact of catch-up fees and seed mark-to-market gains at SLC in the prior year, partially offset by higher fee income at MFS and net investment income in the Solutions and Other segment. Reported net income includes the final costs associated with completing the BGO and Crescent acquisitions at the end of March. Fundraising and deployment activity across the platform remained solid. Gross inflows were led by Crescent's flagship private credit strategies and BGO's European debt platform alongside continued institutional engagement in MFS, where gross flows were consistent with last quarter and included 12 new institutional mandates over $100 million. Net outflows were driven primarily by elevated U.S. equity redemptions at MFS. At the same time, ETFs, fixed income and SMA products continued to see growth with $2 billion in net inflows in the quarter. Sun Life Asset Management managed assets increased 7% over the prior year, reflecting strong fundraising and deployment at SLC, demonstrating the continued scale of the platform and growth in AUM from positive public equity market performance at MFS despite outflows. Turning to Slide 15. Canada underlying net income of $370 million increased 7% from prior year, reflecting higher fee income from higher AUMA and strong net investment results in the Asset Management and Wealth businesses, alongside solid performance in Sun Life Health and Individual Insurance. Reported net income of $87 million reflects the charge from the proposed legal settlement and market impacts from a flattening yield curve and lower equity and real estate performance. Canada's Wealth platform reached $261 billion in AUMA, up 12% from last year with strong retail adviser activity and market appreciation. Insurance sales declined year-over-year from a record in Q1 2025, which included a significant large case sale in Sun Life Health. Q1 2026 Sun Life Health sales remain above our historical quarterly average. In Individual Insurance, sales declined, reflecting lower participating life sales as we continue to focus on optimizing our product mix. Turning to Slide 16. Our businesses in the U.S. continue to build momentum. Underlying net income is up 6% from growth in medical stop-loss from strong premiums and cost discipline as well as solid contributions from in-force management supported by favorable investment results and insurance experience. Sales were solid across all businesses. Medical stop-loss sales increased 43% year-over-year, building from strong fourth quarter momentum and continued success in winning high-quality business in a hardening market. This reflects our disciplined approach to pricing and risk selection. In Dental, we continue to execute on our strategy to improve business mix, and we're seeing solid growth in commercial sales. The decline in premiums this quarter reflects the impact of our deliberate actions to reprice and, in some cases, exit underperforming Medicaid business. As expected, this is resulting in lower membership but an improving loss ratio. As part of this repositioning, the U.S. team remains focused on aligning expenses to the lower revenue base to improve profitability in the near term. Turning to Slide 17. Asia had another excellent quarter with underlying net income increasing by 23% over the prior year, driven by robust sales growth, lower expenses and higher investment earnings. Insurance sales exceeded $1 billion in the quarter with growth across most markets. Hong Kong individual insurance sales increased 75% with double-digit growth across all distribution channels and a 25% increase in agent count. Indonesia delivered 40% sales growth with higher margins generated by the strong momentum from the CIMB Bancassurance partnership. New business CSM grew by 23%, driven by the strong sales growth we've seen across Asia. CSM margins reflect increasing competition and the impact of regulatory changes. Turning to our capital position on Slide 18. We ended the quarter with a LICAT ratio of 143%, which decreased 14 percentage points over the prior quarter with 10% of the decrease driven by the BGO and Crescent acquisitions and the remainder from the impact of markets and lower reported net income. We delivered book value per share growth of 2% to $41.10 and maintained a financial leverage ratio of 23.2%. Total CSM of $14.7 billion increased 8% over Q1 2025, driven by strong insurance sales through 2025, which continued this quarter. These metrics underscore our continued financial strength and provide resilience in more volatile periods. Turning to Slide 19. In the quarter, we returned $0.5 billion to shareholders through common shareholder dividends, delivering a dividend yield of 4.2%. We also announced our intention to renew our NCIB, subject to regulatory and TSX approvals, enabling the repurchases of up to 10 million common shares, returning capital as market conditions permit. In addition, our Board approved a $0.04 increase to the quarterly common shareholder dividend. In closing, our first quarter results reflect the resilience of our diversified business model and the discipline we apply in the execution of our strategy and capital management. We delivered solid underlying earnings, continued progress against key businesses and maintained strong capital and balance sheet strength while returning $500 million to shareholders and preserving flexibility to invest for growth. These fundamentals provide a strong foundation for navigating ongoing market volatility, supporting our strategic priorities and delivering consistent progress towards our medium-term objectives. With that, I will now turn the call back to Natalie to begin the Q&A.

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

(Operator Instructions) Our first question is from Doug Young with Desjardins.

Just wanted to kind of go through the decline in the LICAT from 157% to 143% because it was a bit of a surprise to me. And maybe you can just walk through, Tim, just the moving pieces because I thought the SLC buy-in was about 7 points, maybe it's now 10%. I don't know what the difference. Maybe you can talk a bit about that. And I get the markets had about 1 point impact, legal provision probably 1% impact, and I get that there wasn't much organic capital generation. But I'm just trying to bridge between the 157% and 143%. Maybe we can kind of start there.

Doug, this is Tim. Happy to touch on that. So as you noted, the LICAT ratio did reduce by 14% this quarter. We did finish the quarter with a very strong LICAT ratio overall at 143%. But 10% of that was really coming from the SLC acquisitions. That was $2.4 billion in deployment. And just as a reminder, about every $250 million in capital deployment equals about 1% on the LICAT ratio. And for the last two quarters, our LICAT was obviously high as we had prefunded the acquisitions through the debt. So that accounts for the bulk of the change. The remainder really is coming from markets, as you noted; that was actually a 2% impact, about 1% was coming from the MetLife legal settlement and the remaining 1% effectively from dividends and other items. And so overall, that accounts for the 14-point decline. And as I said, finished strong at 143%. And I think we're quite pleased with that being a leading LICAT ratio.

And maybe just a follow-up. I appreciate that. Can you quantify, because I'm increasingly becoming challenged in doing this, what you view as excess capital and walk through the buckets between what's in the holdco, the excess of what you would want to hold there, and what's in the opco? And maybe on the opco side, what do you think is the minimum LICAT and the binding constraint on that side?

Yes, sure. So again, very, very strong capital position. This quarter, we finished at 143. We have a low leverage ratio of 23.2% and the holdco cash of $1.3 billion. And when you look at the composition of capital, the move to IFRS 17 really changed the overall composition for the industry. And so in our case, 60% of the LICAT ratio is comprised of the contractual service margin and the risk adjustment and which LICAT refers to that as a surplus allowance. And both of these are really high-quality capital items and as they represent future earnings for us, they also act as a shock absorber for market volatility and economic downturns. And this quarter, we finished with a CSM balance of $14.7 billion, and that has grown 8% year-over-year. And it's not currently liquid, but it converts to earnings over time at about 8% to 10%. So on your comment, to get a sense of our deployable capital, really, I think you should think about that as our holdco cash balance as well as our surplus balances, and that broadly reflects our deployable capital. The remaining part of our capital has been deployed in our business, and that's generating a great return as you can see in our results. This quarter, we had an ROE of 18.7%, and we're making solid and consistent progress towards our medium-term objective of 20%. So hopefully, that gives you a good flavor of how to think about our capital and also the proportion that's deployable.

Yes. If I may follow up briefly on that. And lastly, you're planning to put an NCIB in for 1 point, I think it's 1.7% of shares outstanding. Kevin, my question is if you go through this by midyear, would you reload? You didn't reload last time, and I understand that was because you had the SLC buy-in come in. I'm just curious: it seems like you generate a lot of excess capital, and 1.7% of the shares outstanding doesn't seem high. I don't think you're interested in big acquisitions, so if you get through that faster than you expect, would you reload?

I think Tim described it well. If you look at the cash at the holdco, that's what we view as deployable capital, and that's what determines the size of the buyback we're doing. We continue to optimize inside SLC and move capital up, and you've seen us do that effectively. We also require cash flow from the businesses and from the acquisitions we make, so tracking the cash at the holdco gives a good indication of what is deployable. Our priorities remain the same, as Tim said: funding organic growth, funding the dividend, and pursuing M&A where we need scale or capabilities. We have deployed capital into those areas, but at this point the M&A pipeline is quite small, and execution across the business is our main focus. So you are seeing excess cash used for buybacks, but we keep the flexibility to do other things when appropriate. Does that help, Doug? To step back, over the last 10 years we've deployed a lot of cash into M&A. We've grown SLC from zero in third-party assets to $260 billion and built strong capabilities across the Alternative Asset Management platform that we didn't have before. We've invested in scale and distribution in Asia, which is serving us well as you saw in Manjit's business, and we've deployed capital in the U.S. long term as well. We've also expanded into the dental business in the U.S., which is one of our core initiatives, and David is working hard on executing that. Those capital deployments have produced good results. Right now the businesses are focused on executing, and when you look at cash at the holdco you see us using it for buybacks. I continue to monitor this, we keep pushing to move more cash up to the holdco, and we intend to return it to shareholders when we can.

The next question is from Gabriel Dechaine with National Bank.

Just a numbers one, if you'll indulge me here. The morbidity experience in the stop-loss business was improved. Can we get a more specific number around that? Because I want to get a sense of how much of that stop-loss repricing and other actions you've been taking has actually had an impact because it was offset by the employee benefits, LTD morbidity, which went the other direction.

Gabriel, this is David. Thanks for the question. Yes, the stop-loss business continues to perform very well, reflecting the quality of the business and the franchise we have. We continue to have a disciplined approach to pricing and risk selection. And our Q1 experience reinforces really the quality of our business and the confidence we have in our current pricing. So we did see material improvements in that business. It was offset somewhat by more unfavorable disability experience in Employee Benefits business compared to Q1 of last year. Disability in Q4 was actually worse than Q1, but it did improve. But year-over-year, it was down and less favorable. And that's partially because we had a very favorable quarter in Q1 of 2025. So consistent with what we're seeing more broadly in the rest of the industry, the disability business is sort of moving back to more normalized levels, and we expect it to be similar to this in the future.

Yes, that's very descriptive. You're not sharing any numbers, though. I think the issue in that particular business line over the past year was the negative experience, and we saw that in the first three quarters. You took some actions and to get confidence in the effectiveness of those actions, it would be helpful to get some numbers. Could you give me that, please?

Gabe, it's Brennan Kennedy. So the experience in the quarter for that business was the morbidity experience of CAD 8 million. So that's the specific number.

That's the stop loss.

That's right. That's correct.

Okay. I could take more of that offline. I think the dental business strategy makes sense. You're exiting some relationships, I assume the more intermediated ones as opposed to direct ones in the Medicaid business. I want to understand how much of that business could be affected. Does this quarter's Medicaid revenue represent a new run rate and have you completed your pruning, or could we see it dip further? What sort of offset could there be from the cost containment you mentioned and from the improved benefits ratio of the business you're retaining? I want a sense of whether we've hit a bottom here or not.

Yes. It's David again. Thanks for the question. As Tim and Kevin noted, we continue to execute on our strategy and are very much focused on improving the mix of our business. We have been taking pricing actions. You can see some of that in the change in revenue that we've seen this quarter and also, of course, growing our commercial business. Over time, we expect to continue to improve this. We have a path forward on improving the business, and we remain focused on that path. We do expect the business mix to change as we continue to improve our sales and momentum in our commercial business. And we are staying very focused on maintaining relationships where we can have a line of sight to more reasonable margins over the long term for that business. We remain very focused on that path, and we're working with our partners to do that. So I expect, certainly in the second half of the year, we'll see continued improvement in this business.

The next question is from Mike Ward with UBS.

I was just wondering if we could run through the drivers of some of the Asia strength and I guess, the sustainability of the earnings strength, but also the growth in sales, I think, was a little bit better than expected. And it's good to see. But I guess we just kind of thought that markets like Hong Kong might slow down a little bit. So just wondering if you could just help us understand what's driving that on the ground?

It's Manjit. So as you mentioned, we had a great start to the year in Asia in 2026, and that builds on the really strong performance we've had over the last two years. And we've seen strength across all of our financial metrics, not only sales, but also CSM, net income and ROE. And in terms of what some of the key factors are that are driving some of the performance, I think it's a number of things. So one is really the investments that we've made in distribution are paying off. So we've seen growth across all of our distribution channels. Our agency force is stronger, not just in numbers, but also more productive. We've invested in new bancassurance arrangements over the last two years, both in Hong Kong and in Indonesia. And we're deepening our broker relationships as well. We're also making investments in brand and our brand strength is at record levels, and that's a really important competitive factor in Asia. We're also really focused on meeting the needs of our clients, put a sharper focus on that, and our client CSAT scores are also at record highs. And then really looking at our end-to-end business processes and making sure that we're strengthening those and delivering really strong client experiences. And of course, all of that's underpinned by our team. And we've made some investments in our team and really brought in strong talent. So I think all of those things are driving the performance you see.

Okay. I had a strategic question about the U.S. Where do you see your business mix, or how would you like it to trend over the coming years? You mentioned not seeing many potential M&A targets. Are there areas where you might consider inorganic growth in the U.S.?

I can start and then David can jump in. Our focus in the U.S. protection side and the insurance side in the employee benefit space, which is a capital-light business is really important to us. And we see that as being aligned to our purpose and aligned to what we're trying to achieve. And we've had that focus since the end of the global financial crisis, and it served us well. So I think continuing to build out on the benefits side and building scale there, which is why we did the dental acquisition and why we did the Assurant acquisition was building scale in that employee benefit space. We have scale now in stop-loss or now we've had scale. We're a leader in the stop-loss side, and we're pretty happy with how that performs and the capabilities we have. We've added certain capabilities around it to make that business stickier like PinnacleCare, and we've talked about that in the past. But that focus on the benefit space and building that out because it is capital-light and has been one of our key focuses. So I don't know, David, if you want to add some color to that.

Yes. Thanks, Kevin. The only thing I would add is, obviously, we really have a strong portfolio of businesses in the U.S. that we're very focused on and how we execute on. As Kevin noted, we are the largest independent writer in the stop-loss business and the additional capabilities we've added over the last number of years around cost containment, around health care navigation are really very important to clients in the space, especially in a very disruptive health care environment. And then our Employee Benefits franchise is really strong, and it's now bolstered by the strength of our dental business which brings a new element to that business. So we see opportunities to both cross-sell with existing clients and also get into new segments of the market that we haven't been in historically on the strength of the platform and the scale of our business now. So it's something we're very focused on. And of course, improving the quality of our business in dental is a key part of that as well.

The next question is from Paul Holden with CIBC.

I want to ask a question related to the U.S. business. And what we should be expecting in sort of Q1 and Q2 in terms of that improved profitability and stop loss? Because typically, those aren't big experience quarters. So I think when you're talking about the experience in Q1 2026, that would probably be the improvement in 2025 cohort over 2024. And correct me if I'm wrong on that. But really where I would have expected to see improved profitability is in an expected PAA or short-term insurance earnings, and we didn't see any growth there. So just curious on those two points, particularly the last one, like with 21% premium growth and I guess, an anticipated better margin, why isn't expected short-term insurance earnings growth more than zero.

Paul, it's Brennan Kennedy. We review that expected level at the beginning of each year for each of the group PAA businesses, meaning the group business in Canada and the stop-loss, employee benefits, and dental businesses in the U.S. We reviewed that this quarter. In the U.S., we saw increases in expected earnings on short-term business in the stop-loss line, driven by higher volumes. We saw increases from higher margins in the employee benefits business and decreases in the dental business from both lower volume and lower margins. Overall, in the current numbers there is an increase for the stop-loss business.

And Paul, it's David. Just to add to that, you're right on in terms of our Q1 performance is largely reflecting experience from the 1/1/25 cohort that has been playing out. So this was the fifth quarter of that. That cohort is now 92% complete. And the experience was very much consistent with our experience in Q4 and gives us quite a lot of confidence in our current pricing and the trajectory for that business.

Okay. That's helpful. So the key message there is stop loss expected insurance earnings is up, but it's being offset by Dental, right? So I think that was the message.

That's correct.

The next question is from Tom MacKinnon with BMO Capital.

Kevin, you mentioned in your prepared remarks, you expect SLC to rebound solidly over the remainder of 2026. If we look at SLC, we kind of see there's flat fee-related expenses and for some time now and down year-over-year, but we don't see much growth in fee-related revenue. So can you elaborate on how much this solid rebound is going to be and what's going to drive it for the remainder of 2026? And then perhaps what to expect for 2027?

Yes. Thanks, Tom. I'm going to turn it over to Steve. But you will have heard us say last year that we expected the SLC to outperform what it did last year, and we still expect that to happen over the next three quarters. But Steve can provide some more color on how the business is doing and how it's all come together.

Yes. Thanks, Kevin. Tom, thanks for the question. Let me address a few points because there are several aspects to your question. First, a word on the quarter. Fee-related revenue and underlying net income were weaker than they have been for the quarter, and a few things conspired to cause that. On the revenue side, a couple of items were really timing-related: revenues came down this quarter but will come in subsequent quarters as we invest money, and that hit the management fee line. At the same time we saw seasonality: property management fees are almost always down in the first quarter versus the fourth because leasing activity is back-end loaded. On the expense side, first-quarter employment-related costs tied to bonus payments were higher. Finally, we often have catch-up fees and performance fees moving the other way, and we really didn’t have any of those this quarter. Put that together and it led to a weaker quarter. You mentioned the supplement and the management fee line, which can look flat over several quarters. That’s a bit misleading because that line includes catch-up fees, and those move around. If you exclude catch-up fees and look from Q2 2024 through Q3 of this year, management fees are up about 10%, and you’re seeing that grow with fee-related AUM. Quarter-to-quarter, we raised another USD 4.4 billion this quarter, and net flows for both fee-earning AUM and AUM were positive $4 billion. We’ve essentially had a decade of uninterrupted quarterly positive net flows and expect that to continue. I actually think, depending on timing of closes, you’ll see an acceleration of fundraising next quarter, and we would expect management fees on a quarterly basis to start increasing over the course of this year as well. Looking longer term, the acceleration in growth is going to come from how we manage the platform, which may be underappreciated. To date, we have reported SLC as a business, but it has actually been four or five distinct businesses. That was intentional when we bought BGO and Crescent; we left them to run their businesses, provided seed capital, and didn’t do much to coordinate given the deal structures. With the put calls behind us, starting at the end of March we can now manage this business as a consolidated, holistic platform. That means we can present ourselves to the market more clearly as a platform, which matters when competing with the biggest institutions that prefer to deal with fewer managers. Internally, we can pursue efficiencies and synergies we haven’t before. Those are the areas where you’ll see acceleration of growth over the coming years.

It's Kevin again. Sorry, Tom. We have put together a really strong collection of businesses, and as we bring them together, and as Steve mentioned with management buying in, there is good alignment toward growing earnings. I would treat the 30% as an outlier for the quarter, and you will see some volatility in that business because of seed capital, catch-up fees, and similar items. We expect earnings per quarter to grow over the next three quarters and into the future. We've talked about a 20% CAGR for SLC, and that remains our target.

It would be a mistake to look at this quarter and think that that has, in some ways, changed the momentum of the business. It's just not the right way to view it.

The next question is from Darko Mihelic with RBC Capital Markets.

I have so many that I'll probably take some of these offline, including the ones on private credit. I just wanted to focus quickly on the Canadian business, recognizing that your sales mix isn't quite where you want it to be. Two parts to my question. First, what is your appropriate mix? What do you want to be selling more of? And, more to the point for my model, I'm interested in CSM growth. I noticed that over the last two quarters CSM is actually down. It's not a big deal, I get it, but I want to understand better where you can take this and what I should be thinking about for CSM growth in the Canada business?

Darko, this is Jessica. I think you're probably referring to our mix of business for individual insurance, which then would be the participating and the non-participating mix. And I think as we said last year, it was a deliberate balanced portfolio so that we are much more in tune with both participating and non-participating. I think where we want to get to is that for the non-participating, as you see from last year, we invested a lot both in underwriting, in the way we do our product, distribution. So it has a 10% growth, and we intend to continue a 10% non-par growth for the medium-term objectives. So you see a natural rebalancing there. I think for the CSM growth, you will see that you don't see the split between the total and the shareholder. But total, I think you should expect a positive number. I think if you look at our insurance kind of earnings from the release of the CSM and the risk adjustment, it should be around 5% to 6%, in line with our medium-term objectives. And hopefully, that's helpful.

Sorry, the 5% and 6%, do you mean the growth of that in the income statement or the actual CSM growth?

The growth in the income statement, which you can infer a bit because we do have, for example, CSM depreciation is about 8% to 9% every year and so on. So that should be roughly translating to the growth of the pool of the CSM. And then the other thing that maybe I'll note while we're on this because I hardly get a question is then on the other parts of the business, I think we've been really growing our wealth asset management business, as Kevin and Tim were saying. And you can see the other fee income had a huge increase, I think, from $55 million to $88 million, which is a 60% increase. It's become now 25% of our earnings, which is, I think, due to, one, AUMA of $261 billion going up by 12%. So it's a much larger size. And then I think we're also getting some synergies because now our wealth business actually has scale. So actually it's much more efficient. So I think that will continue to be another strong business earnings growth engine.

Darko, it's Kevin. I was running individual when we reintroduced participating into the individual business, and we never expected it to be such a big component of our sales. We knew it was a good component for clients, but the profitability is lower relative to the non-participating sales. So I think Jessica is bringing that sort of back in line where we're getting a better balance between participating and non-participating sales and more in line with what our expectations would have been a long time ago when we did the strategy.

Okay. Understood. I appreciate that. And just a quick question on the U.S. We can see in this quarter the step function in the premiums for medical stop-loss, which is great. Is there a lag? Or is that more or less now the run rate we should think about for this year? And at some point, I'd love to talk about the return on your premiums, but I think you're still maybe for the whole business targeting 7? Or should we think about that as maybe modestly being higher now that the stop-loss has repriced in a hard market and your net premiums are higher.

Yes. So Darko, it's David. Thanks for the question. We obviously continue to see good strong momentum with that business, and we have had an external target of 7% after-tax margin for the combined Group Benefits businesses. And obviously, as this becomes a larger component, that's something that we'll stay focused on and making sure we're above that target over time. At the same time, it is a business that we continue to see a lot of progress with. And I expect that this is what you should expect going forward.

We have no further questions at this time, and I will turn the call back over to Ms. Brady for closing remarks.

Thanks, operator. That will be the end of the call.

This concludes today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day. Goodbye.