Earnings Call Transcript - SLF Q2 2021

Operator, Operator

Good afternoon, ladies and gentlemen. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Sun Life Financial Second Quarter 2021 Financial Results Conference Call. The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Mr. Bitton, please go ahead.

Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets

Thank you, Sarah, and good afternoon, everyone. Welcome to Sun Life's Earnings Call for the Second Quarter of 2021. 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 remarks with a message from Dean Connor, our Chief Executive Officer. We'll then turn it to Kevin Strain, President and incoming CEO, for highlights from the second quarter. Following Kevin's remarks, Manjit Singh, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After their prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions this afternoon. 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 Dean.

Dean Connor, CEO

Thanks, Yaniv, and good afternoon, everyone. As you know, this is my last quarterly earnings call, and I have just a few comments before turning it over to Kevin. It has been the privilege of a lifetime to lead Sun Life for the past nearly 10 years. This is such a great business. We have a noble purpose, helping clients achieve lifelong financial security and live healthier lives. We've put clients in the center of everything we do. And that plus our purpose has created a magnetic pull for talented employees and advisers who want to have an impact, who want to grow their careers and be part of a winning team. It's that talent and culture that has allowed us to execute effectively on our 4-pillar strategy. I do want to thank our investors who have supported Sun Life's growth strategy and this management team over time. We have benefited from your many questions and suggestions, and we've always imagined that you are in the room alongside us as we made critical decisions around the allocation of your capital. I also want to thank the many sell-side professionals who have followed Sun Life and who have invested the time to understand our story and our future prospects. The company will be in great hands with a strong and experienced executive team and with Kevin Strain at the helm. Kevin's skills, character, and his experience leading businesses in Canada and Asia and more recently as our CFO have uniquely equipped him to lead Sun Life onward to future success. And with that, I'll now turn the call over to Kevin.

Kevin Strain, President and incoming CEO

Thanks, Dean, and good afternoon, everyone. Over the past 10 years, Dean has built a strong foundation for Sun Life, underpinned by our 4-pillar strategy and our focus on clients while nurturing a strong culture, where our people can thrive. Dean is leaving behind a lasting legacy at Sun Life. Under Dean's leadership, the company has made key strategic decisions that drove top-quartile returns for our shareholders, with annualized total shareholder returns of over 18% during his tenure. On behalf of our employees, advisers, and partners around the world, I want to thank Dean for his guidance, inspiration and leadership over the past 15 years he's been with Sun Life. Dean, you are retiring from Sun Life on a high note, and I know you will continue to follow the company closely and will be cheering us on. We wish you the very best. Turning to Slide 5 for the highlights from the second quarter, reported net income of $900 million was up $381 million. Underlying net income and earnings per share increased 19% from the prior year, reflecting strong growth across our businesses, driven by investments in our people and technology, as we continue to emerge from pandemic conditions. We also generated a strong underlying return on equity of 16% in the second quarter. With a LICAT ratio of 147% at SLF, we continue to have a strong capital position, which provides flexibility and the opportunity for capital deployment. While we've been operating and executing in a challenging environment over the past 18 months, we have maintained a relentless focus on our purpose of helping our clients achieve lifelong financial security and live healthier lives. We continue to invest in ways to make it easier for clients to do business with us. In June, we announced that clients in Canada between the ages of 18 to 40 can now qualify for up to $5 million in life insurance coverage without the need for lab exams. This means that approximately 75% of clients may not require lab exams going forward. We are transforming our underwriting processes through data and analytics, using predictive models to replace previously required health tests. At a time when health and financial security have never been more important, we are making life and health insurance more accessible than ever before for our clients. In Asia, we have made substantial investments in our technology, tools and products. For example, in Hong Kong, our mandatory provident fund offering continues to outperform the market. We are now ranked first in net inflows and third in assets under management based on second quarter results. We are adding new and innovative capabilities to our group businesses in the U.S. On July 1, we completed our acquisition of Pinnacle Care, a leading U.S. health care navigation and medical intelligence provider, which is now part of our U.S. stop-loss and health business. Sun Life and PinnacleCare create a new dynamic that will improve care, outcomes and costs for our clients. PinnacleCare's health advisers help members navigate the complex U.S. health care landscape to identify the best possible treatment options for their unique conditions, leading to better client health outcomes. Sustainability continues to be a strategic priority for Sun Life. Our commitment also includes sustainable investing. Recently, MFS and InfraRed Capital, our infrastructure manager in SLC Management, joined the Net Zero Asset Manager Alliance. In Q2, we also made several investments across our private fixed income portfolio that align with our sustainable investing goals and, more importantly, demonstrate the positive impact we can have on society. These include sustainability-linked financing to a North American shipping company that is reducing the carbon intensity of its fleet annually while keeping in line with ambitious quantifiable decarbonization targets. We also invested in green bonds, where proceeds will be used to improve the efficiency of certain buildings. These are examples of how we continue to incorporate sustainability into our investment decisions. In the second quarter, wealth sales and asset management gross flows were up 8% from the prior year on a constant currency basis, driven by strong gross sales at SLC Management and higher wealth sales in Asia and Canada. In Q2, 96%, 61%, and 93% of MFS' U.S. retail fund assets ranked in the top half of their Morningstar categories, based on 10-, 5-, and 3-year performance, respectively. Moving to digital highlights on Slide 6, we look at how digital is helping us deliver on our purpose of helping clients achieve lifetime financial security and live healthier lives. In Canada, our digital coach, Ella, continues to connect with our clients, helping them save for their future and ensure protection of their loved ones. In the first half of the year, Ella's nudges drove nearly $500 million of wealth deposits and the sale of over $650 million in life insurance coverage for our clients. In the U.S., we are helping clients get the coverage they need through new offerings and digital capabilities. An example of this is the expansion of our online dental health center capabilities, which enable clients to receive dental estimates and access advice virtually from leading dentists. We also continue to advance digital in Asia. In the second quarter, 74% of new insurance applications were submitted digitally, an increase of 41 percentage points over Q2 last year. Stepping back, we're pleased with the results Sun Life achieved in the first half of the year. We've delivered double-digit earnings growth, strong ROE, and maintain a solid balance sheet that provides us with significant flexibility. As some parts of the world have slowly started to open up, we've received many questions about our future work status. Last month, we outlined our guiding principles for our employees for the post-pandemic future of work. This includes supporting flexible work styles, revolving around our client and business needs. In our offices, we're committed to providing safe and healthy working environments that are designed for smart collaboration, productivity, and creativity. We want the office to be a magnet for employees at times when face-to-face collaboration is more effective, and we're making investments in our office spaces to enable this. And whether employees are working from home or in the office, we're committed to providing them with a great seamless work experience with the tools, technology, and support they need to do their jobs. Our approach to a hybrid working model supports our goal to attract and retain talent and accelerates our ambition to be one of the best insurance and asset management companies in the world. On a personal note, I'm looking forward to taking on my new role as CEO. I'm committed to building on Sun Life's success and keeping our clients at the center of everything we do, while remaining focused on our key strategic priorities, including continuing to push and support our digital innovation and transformation, making sustainability a key part of our strategy across insurance and asset management, leveraging our asset management strength, fostering a diverse, equitable and inclusive workplace, and above all, nurturing our strong caring, optimistic Sun Life culture where employees can develop and thrive. With that, I will now turn the call over to Manjit, who will take us through our financial results.

Manjit Singh, Executive Vice President and Chief Financial Officer

Thank you, Kevin, and good afternoon, everyone. I also want to take a moment to recognize Dean's tremendous contributions during his tenure as CEO and wish him all the very best. Let's turn to Slide 8 for an overview of our second quarter results. Sun Life delivered good results with strong momentum across all our business pillars. Reported net income of $900 million was up 73% from the prior year, reflecting a recovery of market-related impacts as well as higher underlying net income. Underlying net income of $883 million was up $144 million or 19% from the prior year, driven by business growth, favorable credit experience, and a more normalized effective tax rate for the current quarter. These factors are partially offset by unfavorable foreign currency translation, lower investing activity gains, and higher incentive compensation, reflecting strong year-to-date performance across all of our businesses. Q2 underlying earnings per share were $1.50, and underlying return on equity was 16%. Assets under management climbed to nearly $1.4 trillion, reflecting market value growth and strong net flows at SLC management. For the first half of 2021, our wealth and asset management businesses generated $14 billion of net inflows compared to $8 billion in the first half of 2020. Book value per share was up 2% from the prior year, reflecting strong reported net income growth, mostly offset by foreign currency translation. Excluding impacts and other comprehensive income, book value per share increased 10% over the prior year. Our balance sheet position remained strong. Q2 LICAT ratios of 147% at SLF and 125% at SLA were up 6 percentage points and 1 percentage point, respectively, from the prior quarter. The main driver of the increase at SLF was the issuance of $1 billion of limited recourse capital notes, which added approximately 5 percentage points of LICAT. The issuance also increased holding company cash to $3.2 billion, and the financial leverage ratio ended the quarter at 24.7%. Subject to regulatory approval, our intention is to redeem 2 series of fixed-rate preferred shares totaling $725 million at the end of the third quarter. Upon redemption, SLF's LICAT ratio will decline by approximately 3 percentage points and the financial leverage ratio will decline by approximately 2%. Slide 9 highlights the performance of our business groups. Given the significant impact of foreign currency translation on our year-over-year results, we've also provided earnings growth in constant currency on this slide. Canada's reported net income of $404 million in Q2 was up $287 million over the prior year, driven by favorable market-related impacts. Underlying net income of $290 million increased by $9 million, reflecting continued business growth in insurance and wealth management as well as favorable credit experience. This was partially offset by a lower contribution from investing activities as the prior year included gains related to investments initiated while credit spreads were more favorable. The U.S. reported net income of $157 million was up $39 million versus the prior year, reflecting higher underlying net income. Underlying net income of $165 million was up $42 million or 51% on a constant currency basis, driven by favorable mortality, morbidity, and credit experience as well as higher investing activity gains. This was partially offset by unfavorable expense experience from higher incentive compensation costs, reflecting strong results in the first half of 2021. The U.S. Group Benefits business achieved an after-tax margin of 8.5% on a trailing 12-month basis, up from 7.5% in the prior year. Asset Management reported net income was $221 million, down $2 million from the prior year. This reflects fair value adjustments on MFS share-based awards and the impact of a U.K. tax rate change in SLC management, largely offset by underlying net income growth. Underlying net income for MFS of $286 million was up 41% on a constant currency basis, driven by strong average net asset growth, partially offset by higher variable compensation expenses. MFS ended the quarter with a pretax net operating margin of 39%. SLC Management generated underlying net income of $25 million, which was down from the prior year due to lower performance fees, partially offset by contributions from the InfraRed and Crescent acquisitions. In Asia, Q2 reported net income was $143 million, up $17 million year-over-year. This was driven by improved market-related impacts, partially offset by unfavorable foreign currency translation. Underlying net income of $152 million was up 17% in constant currency, driven by business growth and favorable credit experience. This was partially offset by higher compensation costs and an unfavorable mortality experience in the India joint venture. Corporates reported a net loss of $25 million improved from the prior year, driven by higher net tax recoveries in the quarter, partially offset by unfavorable expense experience and lower seed investment gains. Slide 10 provides an overview of our sources of earnings. Expected profit increased by 9% from the prior year. Excluding the asset management pillar and the impact of currency, expected profit was up 7%, driven by business growth in Canada and Asia. New business gains increased by $21 million over the prior year, reflecting strong sales growth in Asia, along with robust sales growth in individual insurance in Canada. Experience gains of $99 million were primarily driven by market-related impacts. Earnings on surplus of $118 million declined by $37 million from the prior year, which included higher seed gains. Turning to Slide 11, which outlines insurance and wealth sales on a constant currency basis. Individual insurance sales were up 52%, driven by higher participating policy sales in Canada and an increase in sales across most markets in Asia. While sales in Asia have improved, we are seeing renewed lockdowns in some countries as a result of new variants. We are working closely with our local teams to monitor the situation. The slight decline in group benefit sales was driven by lower stop-loss sales in the U.S. and flat sales growth in Canada as we continue to see fewer large cases coming to market in the current environment. Wealth sales increased 63% on a constant currency basis compared to the prior year. In Canada, sales increased by 47%, reflecting higher Individual Wealth and Group Retirement Services sales. Asia sales increased by 81%, reflecting growth in mutual fund sales in India, money market sales in the Philippines, and the Hong Kong pension business, where we are now the market leader in net inflows. Asset Management gross flows increased by 3% year-over-year, driven by higher gross flows in SLC management, partially offset by lower sales in MFS. MFS ended the quarter with USD 5.6 billion in outflows, reflecting continued inflows in retail, which were more than offset by institutional outflows. SLC Management had strong net inflows of $7.6 billion, which will generate good fee income in the coming quarters. Value of new business generated in the second quarter was $284 million, up 46% in constant currency compared to the prior year, driven by strong sales in Asia and Canada. Turning to Slide 12. Operating expenses were up 15% from the prior year. Excluding the impact of currency, run rate expenses from acquisitions and fair value adjustments, expenses were up 17%. Eight percentage points of this increase was driven by higher incentive compensation and sales-related costs in our asset management businesses, reflecting strong revenue growth. Another 8 percentage points was driven by higher distribution costs in Canada and Asia, reflecting robust sales growth as well as a higher accrual for our annual incentive compensation plan. The increase in the annual incentive compensation plan accrual reflects strong business performance in the first half of the year versus weaker year-to-date performance in the prior year, which included the impact from the onset of the pandemic. The remaining 1% increase was attributable to continued investment in our business, partially offset by savings from our focus on disciplined expense management. To conclude, Q2 was another good quarter highlighting the strength of Sun Life's balance set of businesses, which operate in attractive markets with significant growth opportunities. While the pandemic has resulted in a challenging operating environment, we are pleased with the resiliency and strength our businesses have demonstrated. And we're continuing to invest in initiatives to further enhance our client experience, digital capabilities that transform the way we work, and business opportunities to drive future growth. Now I'll hand the call back to Yaniv Bitton for Q&A.

Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets

Thank you, Manjit. I will now ask Sarah to pull the participants.

Operator, Operator

Our first question comes from the line of Humphrey Lee with Dowling & Partners.

Humphrey Lee, Analyst

And before I ask the question, I do want to extend my congratulations to Dean for your retirement. It's been a pleasure working with you. My first question is related to the U.S. Group Benefits business. One of the health insurers in the U.S. has talked about rising medical costs on the earnings call today. I know a topic of medical inflation is not new. But given the broader inflation concerns, how do you see inflation affecting the stop-loss business? Generally, what have you been your observations so far? And have you looked at how to address that?

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Humphrey, it's Dan Fishbein. Thanks for the question. Generally, when we look at medical inflation in the stop-loss business, we're able to predict that in advance and build that into our rates. And actually, that's been one of the drivers of the growth in premiums that we have in the business. But at the same, there are obviously somewhat unusual effects from the COVID pandemic. What we're seeing in our book of business so far is one of the reasons why we have lower morbidity in that business this year is likely some delays in treatment due to the pandemic. And that plays out in later periods in lower stop-loss claims. Now that's not the only reason we're seeing favorable results. The favorable morbidity is obviously also related to good performance in our underwriting and pricing. We do have some concern about delayed treatment, obviously, on behalf of our members. And that's actually one of the ways that we can use our new PinnacleCare acquisition to help guide people to the right care at the right time. But we would expect that in subsequent periods, we may see some increased utilization as compared to the depressed level of utilization that we've seen in the past couple of quarters.

Humphrey Lee, Analyst

Yes. That's more on the tenant demand or kind of normalization of activities. But given some of the pricing dynamics going on, have you seen any kind of difference or the deviation of medical cost inflation from what you're seeing versus what you have in your pricing assumptions?

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Not at this point. Again, actually, we're seeing quite the opposite because of lower care or delayed care. But as far as the overall trend, there's always medical inflation. That's been a part of medical care in the U.S. for a very long time. And we always have a forecast, which we work with outside actuarial firms to confirm as to what medical inflation will be and build that into our pricing. So at this point, beyond some of the anomalous impacts related to the pandemic, we're not seeing anything that would suggest, for example, a substantial increase in the level of medical inflation.

Humphrey Lee, Analyst

Understood. My second question is related to the strong SLC. I think this is the second quarter in a row that you have secured large capital commitments that's driving higher net. Since these flows haven't been really funded, like how should we think about the lead time getting these inflows versus turning them into fee-earning assets that flow through your earnings?

Stephen Peacher, President, SLC Management

Thanks for your question, Humphrey. We've experienced a couple of strong quarters in terms of inflows, which is a good indication of capital raising across SLC's broad platform. We're very pleased with this outcome. Capital can come in different forms. In this quarter, we've seen significant contributions. For example, money can flow into closed-end funds, where investors commit capital that we then invest over the subsequent quarters. We may also see capital from new separately managed accounts that are funded right away. When we receive commitments for closed-end vehicles, like alternative credit funds or new real estate funds, the investment period typically spans 2 to 3 years, though those funds often get invested more quickly. The timeline for investment depends on the type of commitment we receive. While some funds allow us to charge fees on committed capital before it’s invested, this is not the common scenario.

Operator, Operator

Our next question comes from the line of Meny Grauman with Scotiabank.

Meny Grauman, Analyst

I want to first off, Dean, wish you best of luck in your new chapter. And I hope you get to golf more. In terms of questions, I just wanted to revisit the subject of return of capital. And first off, from the dividend perspective, you're running at a payout ratio below your target range. And I'm wondering when the green light finally comes, so where do you want to be? Do you want to be at the midpoint? And how fast do you think you want to get there?

Kevin Strain, President and incoming CEO

Thank you for your question on the dividend. We remain committed to paying out a dividend in the 40% to 50% of earnings range that we've discussed previously. Once the restrictions are lifted, our intention would be to grow earnings and dividends together in the range of 8% to 10%. This approach gives investors a clear idea of what they can expect from the dividend, ensuring it is sustainable and offers solid growth potential. So we are still aiming for the 40% to 50% range.

Meny Grauman, Analyst

So just to clarify, is it reasonable to assume that you'll catch up and reach that range before your earnings growth aligns more closely with the typical growth rate? Is that what we're discussing?

Kevin Strain, President and incoming CEO

Yes. That's right. That's how you should think about it. We would more quickly get into the range and then we would go back to sort of that sustainable 8% to 10% growth alongside earnings.

Meny Grauman, Analyst

And then just on the buyback front, a lot of excess capital. There is definitely capacity to do buybacks once they're allowed. If I look back pre-pandemic, 2018, 2019, you were buying back about 2%. Is it reasonable to assume that you could buy back more than that? Is that something you're contemplating at this stage in terms of a larger buyback than what we saw pre-pandemic?

Kevin Strain, President and incoming CEO

It's Kevin again. Our focus has always been on investing capital for growth, whether organically or through acquisitions. When we assess our pipeline and determine we have more capital than needed, we decide to proceed with a buyback. This decision depends on the available organic growth opportunities, potential investments, and M&A prospects. We maintain a disciplined approach to capital usage, meaning we closely evaluate our MTOs. As we allocate capital, it should boost earnings growth, meet our ROE targets, and facilitate cash returns. Therefore, our capital deployment will follow the same disciplined framework we’ve used previously.

Operator, Operator

Our next question comes from the line of Tom MacKinnon with BMO Capital.

Tom MacKinnon, Analyst

So just want to offer my congratulations to Dean and team, not only in a great crew at Sun Life but a great crew at Mercer as well and a sort of very rewarding professional life. And I hope you enjoy all the best that comes to you in the ensuing year. So I guess maybe the first question would be for Dan. Just with respect to stop-loss sales, it seems to be the lowest second quarter we've seen in a while. Maybe you can comment on what you're seeing out there in the marketplace. Is there pricing pressure? Any commentary on that? And I have a follow-up.

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Yes, thanks. This is Dan. We are noticing an increase in competitive pricing in the stop-loss business. This is likely due to many stop-loss carriers experiencing favorable outcomes, although perhaps not to our extent. These favorable outcomes are possibly influenced by delays in care, which might be compelling some competitors to adopt more aggressive pricing strategies as they seek to recover from previous sales shortfalls, particularly from last year. Consequently, this is a significant factor contributing to our slightly lower sales. Nonetheless, our sales remain robust. For the quarter, we reached about 85% of the prior year's quarter, placing us well ahead of other independent stop-loss carriers. Despite this, we are committed to our pricing strategy and the profit margins we establish. As such, we are willing to accept a somewhat lower closing ratio if it means preserving our future margins.

Tom MacKinnon, Analyst

As a follow-up, regarding the expense experience losses for the quarter, traditionally, we see minimal activity in the first three quarters, followed by some losses in the fourth quarter to account for incentive compensation and other expenses. How should we expect this pattern to evolve? Was the loss incurred this quarter a catch-up, or should we anticipate a negative impact in the expense experience line whenever there’s an increase in stock price?

Manjit Singh, Executive Vice President and Chief Financial Officer

Tom, it's Manjit. I'll take that question. So the expense experience you saw was largely related, as I mentioned in my remarks, to an accrual we've made on the incentive compensation plan. As disclosed in our proxy circular, the key drivers on that plan are really our underlying earnings, our reported earnings, VNB and various client-related metrics. And we constantly take a look at how we're performing against the targets that we've established. So as you saw this quarter, we performed extremely well alongside all those measures, and the accrual really reflects that strength and performance.

Tom MacKinnon, Analyst

And is that the strength and performance over what time frame? Is that just over fourth...

Manjit Singh, Executive Vice President and Chief Financial Officer

It's the year-to-date view.

Tom MacKinnon, Analyst

And so you haven't made any adjustments in the last 12 months up until this time?

Manjit Singh, Executive Vice President and Chief Financial Officer

No, it's year-to-date fiscal. So it would have been for the first six months of the year.

Tom MacKinnon, Analyst

Year-to-date fiscal. So if we saw a similar kind of growth in 6 months of underlying earnings in VNB, would we expect a similar kind of expense experience loss?

Manjit Singh, Executive Vice President and Chief Financial Officer

We have an annual target, Tom. So we would look at how we're trending on the annual target and what that payout would suggest relative to what we've accrued year-to-date and make any adjustments that are required.

Tom MacKinnon, Analyst

Okay. So you're going to revisit this more on a quarterly basis instead of...

Manjit Singh, Executive Vice President and Chief Financial Officer

Yes, we think that's more appropriate because it really then matches up the performance in the quarter against the expense in the quarter.

Kevin Strain, President and incoming CEO

Tom, it's Kevin Strain. I'd just note that the 3 big elements of our annual incentive pay are reported earnings, underlying earnings, and VNB. And you can see that reported earnings, there's a big jump up this year with the economic conditions. And so that starts to come through as through the other elements. So that gives you a sense of what the three most important sort of elements are. The fourth one is client performance, and that's also on an annual basis.

Operator, Operator

Our next question comes from the line of Doug Young with Desjardins Capital Markets.

Doug Young, Analyst

Starting with you, Dan, on the U.S. group side, we've noticed a steady improvement in reported earnings, with an LTM after-tax profit margin of 8.5%. You mentioned that things will eventually normalize. Can you provide a timeframe for when we might expect claims trends to start normalizing? Also, could you give us an idea of where this after-tax profit margin is likely to settle? Additionally, could you address this in relation to employee benefits and the stop-loss side?

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Well, thanks. As you know, our target margin is 7% or greater. And as you pointed out, we're now at 8.5%. So well above that number. There are different factors pointing in different directions, which makes it very hard to predict exactly how that will play out over what period of time in the future. So I'll just quickly go through what some of the biggest factors are. On mortality, we obviously, over the past 16 months, have seen significantly elevated group life mortality. That did moderate in the second quarter, although we certainly have some concern about that maybe starting to come back with the delta variant. We continue to see elevated short-term disability claims directly related to COVID. The good news is our long-term disability experience so far has been relatively benign in line with expectations. Dental claims this quarter were in line with normal expectations, but much higher than the same quarter last year because as you'll recall, last year, at this time, dental offices were closed. So there was very little dental utilization. And then, of course, there's the stop-loss component of this as well, which I described a little earlier, but it has been very favorable. We believe the majority of that favorability is due to delays in care related to COVID, but certainly not all of it. There's underlying favorability in our performance that should continue. So as to how exactly all of those factors play out over what period of time, it's not really possible to predict that. We would say we're confident of being able to remain at or above the 7% target. We still feel good about that target.

Doug Young, Analyst

Okay. So we should expect the gravitation over whatever time frame back towards the 7% for this business essentially? And that's what you're trying to...

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Well, I mean not necessarily exactly those words. But because there are different factors that go in different directions. So for example, we may see lower mortality over the next several quarters as COVID hopefully wanes, and we should continue to see some favorability in stop-loss. So it's a little bit hard to say exactly where that will settle out.

Operator, Operator

Our next question comes from the line of Meny Grauman with Scotiabank.

Meny Grauman, Analyst

Kevin Strain, President and incoming CEO

Meny, it's Kevin. Thank you for your question regarding the dividend. We are committed to maintaining a dividend payout in the 40% to 50% of earnings range that we have previously discussed. Once the restrictions are lifted, our aim is to achieve the same growth rate for dividends as we expect for earnings, which is around 8% to 10%. This approach will provide investors with a clear expectation for a sustainable dividend that offers solid growth potential. Therefore, we continue to target the 40% to 50% payout range.

Operator, Operator

Our next question comes from the line of Tom MacKinnon with BMO Capital.

Tom MacKinnon, Analyst

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Yes, we're noticing an increase in competitive pricing in the stop-loss business. This is likely because many stop-loss carriers are experiencing favorable results, possibly not to the same extent as we are, but still positively influenced by delays in care. This situation might encourage competitors to adopt more aggressive pricing strategies, especially to recover from previous sales shortfalls. Consequently, we are experiencing a slight decline in our sales. However, our sales levels remain high, reaching about 85% of the same quarter last year, which keeps us leading among independent stop-loss carriers. Despite this, we are committed to maintaining our pricing structure and profit margins. We are willing to accept a lower close ratio if it means protecting our future margins.

Operator, Operator

Our next question comes from the line of Meny Grauman with Scotiabank.

Meny Grauman, Analyst

Kevin Strain, President and incoming CEO

Thanks for your question on the dividend. We remain committed to paying out a dividend in the 40% to 50% of earnings range that we've discussed previously. Our goal is to achieve this once the restrictions are lifted. We aim for earnings and dividends to grow together in the range of 8% to 10%, which provides investors a clear expectation for a sustainable dividend and good growth potential. So, we're still focused on the 40% to 50% range.

Meny Grauman, Analyst

So just to clarify, is it reasonable to assume that you'll catch up and reach that range before your earnings growth returns to a more typical pace? Is that what we're discussing?

Kevin Strain, President and incoming CEO

Yes. That's right. That's how you should think about it. We would more quickly get into the range and then we would go back to sort of that sustainable 8% to 10% growth alongside earnings.

Meny Grauman, Analyst

And then just on the buyback front, a lot of excess capital. There are definitely capacity to do buybacks once they're allowed. If I look back pre-pandemic, 2018, 2019, you were buying back about 2%. Is it reasonable to assume that you could buy back more than that? Is that something you're contemplating at this stage in terms of a larger buyback than what we saw pre-pandemic?

Kevin Strain, President and incoming CEO

It's Kevin again. Our main focus has always been on using capital to grow, whether through organic growth by investing in the business or through mergers and acquisitions. When we evaluate our pipeline and find that we have more resources than we need, we then decide on buybacks. This decision is influenced by our organic growth opportunities and potential investments, as well as available M&A opportunities. I want to emphasize that we are disciplined in our capital usage. By discipline, I mean we assess our MTOs. As we allocate capital, we aim to support all our MTOs. This approach should enhance earnings growth, meet our ROE targets, and facilitate cash returns. Therefore, we'll deploy capital with the same discipline we've maintained in the past.

Operator, Operator

Our next question comes from the line of Tom MacKinnon with BMO Capital.

Tom MacKinnon, Analyst

Daniel Fishbein, Executive Vice President, U.S. Group Benefits

Yes, we're noticing an increase in competitive pricing in the stop-loss market. This trend seems to be linked to many stop-loss carriers experiencing favorable performance, albeit not as significant as ours, likely influenced by delays in care. This situation may encourage some competitors to adopt more aggressive pricing strategies, especially as they try to recover from last year's sales shortfalls. Consequently, this is a primary factor behind the slight decline in our sales. Nevertheless, our sales remain robust, reaching approximately 85% of our sales in the same quarter last year, which positions us well ahead of other independent stop-loss carriers. We are committed to maintaining our pricing strategy and the margins we have built into our pricing, even if it results in a slightly lower close ratio, as we prefer to protect our future margins. Yes, thanks. This is Dan. We are definitely observing an increase in competitive pricing in the stop-loss business. There is no question about that. We believe that some of this is connected to the fact that many stop-loss carriers are experiencing favorable results, perhaps not to the extent we are, but they are seeing positive outcomes right now, at least partly due to delays in healthcare. This may be prompting some competitors to adopt more aggressive pricing strategies, especially as they aim to compensate for missed sales, particularly from last year. We are seeing that, and it is the primary reason our sales have decreased somewhat. However, our sales remain very high. During the quarter, we were about 85% of the previous year's quarter. This positions us well ahead among independent stop-loss carriers. Nonetheless, we are largely maintaining our pricing strategy and the margins included in our pricing. Therefore, we will accept a slightly lower close ratio if necessary rather than compromising on future margins.

Operator, Operator

Our last question comes from the line of Mario Mendonca with TD Securities.

Mario Mendonca, Analyst

Kevin, you are taking over a company that I still refer to as a life insurance company, but it has a 16% return on equity and a 147% LICAT at the holding company, with relatively low leverage. When I observe this, I believe many on this call would agree that this isn't typical for a life insurance company. So, in light of this, how do you respond to that return on equity? Is your response simply that Dean has made some good decisions over the past decade and that we are not really a life insurance company anymore, making this normal? Or do you consider that your company could handle a significant transaction and potentially manage with a much lower return on equity temporarily? How do you perceive this? Is this the new normal for Sun Life?

Kevin Strain, President and incoming CEO

Thank you, Mario, for your question. You’re completely correct. Dean and his executive team have established a very solid foundation. The efforts made early in his tenure to exit some high capital-intensive businesses and concentrate on fee-based activities, as well as rapidly growing markets like Asia and the recent addition of SLC, have transformed us into more than just an insurance company. Our goal is to become one of the top global insurance and asset management firms. If you aggregate our asset management operations, including GRS, which often resembles an asset management business in Canada and pension risk transfer, we are close to being half asset management. I believe we can continue to enhance our earnings across our four pillars. We see significant growth potential in Asia, which we have discussed could exceed 15%. Canada also holds a strong market position and brand, with potential growth above 6%. Regarding the U.S., which we've discussed extensively, we see robust growth in our Group Benefits segment, particularly in stop-loss, complemented by initiatives such as PinnacleCare and the digital enhancements led by Dan and his team. Thus, our strategy emphasizes reducing capital usage and generating fee income, not just from asset management but also from our global insurance operations, adhering to financial discipline and achieving our capital deployment objectives. We've carefully invested capital to enhance all our MTOs, focusing on earnings growth, ROE, cash flow, and returning dividends to our shareholders. This disciplined approach has been a collaboration with Dean since he became CEO in Canada, and it is upheld by the entire executive team. We remain dedicated to strengthening our business and enhancing our operations with respect to our digital initiatives and line of business strategy across the four pillars.

Mario Mendonca, Analyst

All right. So 16%, or even higher, is not unusual for a company like Sun Life. There is no reason to expect that return on equity will trend back down to 13%, which was the level for much of Sun Life's history as a public company.

Kevin Strain, President and incoming CEO

I think our mix of business, if we continue to grow, we should be able to grow the ROE as well.

Operator, Operator

Our next question comes from the line of Darko Mihelic with RBC Capital Markets.

Darko Mihelic, Analyst

Dean, congrats. All the best. I have a question. I'm looking specifically at Slide 11. And I'm looking at the upper left-hand corner of the individual insurance sales, up 52% year-over-year. A few questions I wanted to poke at on this stuff. The first is, obviously, last year, we know there was disruption, but what's the biggest driver of the sales apart from just now sort of being out there and capable. Like has there been any pricing changes with respect to these policies that are being sold?

Kevin Strain, President and incoming CEO

So Darko, it's Kevin. I think it's best answered by pillar. So I'll turn maybe Jacques first to answer the Canada growth in sales, and then Leo can talk about Asia.

Jacques Goulet, President, Canada

Darko, this is Jacques. Thanks for the question. As you point out, of course, the individual insurance sales are up significantly in Canada, $121 million, up 57%. Remember that in Canada, we have 2 distinct channels. We have Sun Life Financial Distributors and then the third-party, which is high net worth and ultra-high net worth. The high net worth is where the growth is the highest at the moment in Q2. And this business can be lumpy, Darko. In particular, if you put yourself back to the previous quarter in 2020, there was a lot of medical facilities that were closed and so on, we saw lower sales in part because while we announced that we're going to go up to $5 million without labs, when you get to the ultra-high net worth, these are very significant amounts. So there was, I would say, a kind of a buildup of the pipeline, and that has come through nicely this quarter. But I just want to highlight the fact that those can be lumpy from quarter-to-quarter. Leo?

Leo Grepin, President, Asia

Yes. Good afternoon, Darko, and thanks, Jacques. So there are 2 parts to your question. The first one is the increase in sales and the second one was any pricing changes associated with the numbers. In the case of Asia, what you're seeing is a strong rebound on Q2 2020 sales, which were significantly affected by the start of the pandemic. And so we've really worked over the last year to drive distribution capacity in a COVID environment. Some of that has been increasing capacity with our partnerships with ACV, TPBank in Vietnam, for example, but also the growth of our agency. We're up in high single-digit rates in terms of agent count over that period. So strong capacity growth there and strong rebound as well with the digital enablement of all of our distribution. And then the second fact is that we constantly review our product pricing and our product design. And you're right that over the past year, we have taken price action across multiple parts of our business, notably international would have seen some price increases, Hong Kong, Philippines, Indonesia, Malaysia, so quite broad-based as well.

Darko Mihelic, Analyst

Okay. That's helpful. Pricing has increased, and despite this, we're observing a significant improvement in sales. This leads to the next important question: has underwriting changed? Kevin Strain, as you take over this company, how can I be assured that the $473 million in sales is a positive sign, especially since we're now dealing with COVID-19, which seems to be here to stay, and there's a possibility of higher mortality in the future that you would have to cover? Has underwriting changed? Are you inquiring about vaccination status? Are you adjusting pricing based on vaccination rates? Most actuaries I speak with believe it's too soon to gauge the full impact of COVID-19, yet we are moving forward with substantial sales regardless. Ultimately, Kevin, why are you confident about the high volume of life insurance sales being issued when we still lack sufficient information about COVID-19 and its variants, considering the potential negative consequences for your business?

Kevin Strain, President and incoming CEO

I'll let Kevin Morrissey add to this as well, Darko. You know we require a significant amount of reinsurance in this business. We collaborate with reinsurers on our underwriting processes, risk assessments, and overall risk management. Kevin can elaborate further on that. There are several factors from the quarter that I want to recap. First, the previous quarter was the initial phase of COVID, which made it challenging for our agents to operate, and they had not yet adapted to the new tools that were rolled out. In many places, electronic signatures had not yet received regulatory approval. Thus, there has been a considerable change from last year to this year; in Q2 last year, we were newly affected by COVID, while in Q2 this year, we are beginning to emerge from it in several areas with enhanced tools. We also invested in distribution during the pandemic, and Leo mentioned the addition of ACB among other developments. So, there are multiple contributing factors. On the risk aspect, I would again emphasize that we've been examining our mortality experiences related to COVID. We have discussed utilizing more analytics, more data, and innovative ways to assess risk, often collaborating with reinsurers. Kevin Morrissey, would you like to add anything regarding mortality risk?

Kevin Morrissey, Chief Actuary

Yes, thanks, Kevin. Darko, I want to add that we are closely monitoring the pandemic and its developments in various regions. We are paying attention to the risks and trends, and our approach to underwriting and pricing will be very responsive. Your question about the current risk is important. I would highlight our diversification across product portfolios, which provides significant advantages. We operate in multiple markets, and as we observe the fluctuations of the pandemic globally, our diversified business profile helps balance those effects. Additionally, our variety in insurance and annuities plays a role; we are substantial writers of tailed annuities, which have different exposure due to the pandemic. Our results reflect that diversification across various product types. Consequently, this broad diversification allows us to feel confident about the risks we are currently assuming.

Operator, Operator

Our next question comes from the line of Nigel D'Souza with Veritas Investment Research.

Nigel D'Souza, Analyst

I'll try to keep it brief, since you're over time here. I wanted to follow up on individual insurance sales in Asia. And there's a fair bit of color already provided on this. But when I look at it on a sequential basis, your individual insurance sales are down across essentially all the regions except for Vietnam. And I'm trying to understand how much of that is just portal noise like portal volatility and seasonality and how much of that is related to COVID-19 and recent mobility restrictions and lockdowns. Leo mentioned that you haven't seen case counts rise in Hong Kong, but individual insurance sales also down sequentially there. And I know it's a bit hard to predict, but you have a sense of, at least in the third quarter, how your individual insurance sales in Asia are trending? And do you think it's going to drift lower in the short term with some mobility restrictions that are being rolled?

Kevin Strain, President and incoming CEO

Nigel, it's Kevin.

Leo Grepin, President, Asia

Thank you for your question, Leo. Regarding your inquiry about sequential sales, you are correct that in local markets, sales were down sequentially except for Vietnam. There are two factors contributing to this situation. First, as you mentioned, Southeast Asia experienced a resurgence in COVID cases, particularly due to the delta variant, which affected sales across the region. Second, sales in India are down, which reflects a seasonal trend. While some of this is due to the recent COVID wave in India, it’s also worth noting that our India business follows a fiscal year that ends in March, making their Q4 the strongest quarter of the year. Thus, seasonality plays a role here, alongside the effects of the recent COVID wave in other markets. Looking ahead, sales trends are a bit unpredictable, particularly with the current surge in COVID cases and deaths in markets such as Indonesia and Malaysia—countries that have low vaccination rates. Governments are implementing strict movement restrictions, including closing bank branches, which could impact our bancassurance business in Malaysia and Vietnam. This situation creates a level of uncertainty for the market. However, there is also an increase in distribution capacity and strong support for our advisers in digital and non-face-to-face sales, which may mitigate some of these challenges. Despite that, significant uncertainty remains.

Operator, Operator

Our last question comes from the line of Scott Chan with Canaccord Genuity.

Scott Chan, Analyst

Dean, congratulations on your accomplishments at Sun Life, and best wishes for your retirement. I have one follow-up question for Mike at MFS. You mentioned the redemptions during the quarter, but I’m more concerned about the gross inflows. I noticed they decreased by 20% quarter-over-quarter and 25% year-over-year, especially following what seemed to be strong Q2 flows globally. Additionally, I observed that your medium-term fund performance has also declined somewhat. Can you provide any insights on the gross flows, as they appeared to be quite low this quarter?

Michael Roberge, CEO, MFS

Scott, thanks for the question. It's Mike. I think year-over-year comparisons are a little tough in that last year was such an outsized year. We had sales up 40% last year. There was incredible movement in the second quarter. Sort of the opposite of what I was talking about earlier, where at market highs, money comes out of equities into fixed income and sort of was the opposite last year. We saw money come out of fixed into equity, and we were well positioned for that. So I think last year is a tough year to comp off of. When you look at Q2 versus Q1 and you look at active fund sales in the U.S. industry this year, our flows were in line with what happened in the active industry. So the active industry saw flows come down in Q2 from Q1 and I think some of that is related to market being at highs and people not allocating as market continues to go up. Interest rates are relatively low. I think people are sitting on their hands some. So our flows look very similar. If you look at U.S. retail flows, very similar to what happened in the industry Q2 versus Q1.

Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets

I would like to thank all of our participants today. And if there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website by tomorrow morning. Before I end the call, I would also like to congratulate Dean on his successful tenure at Sun Life. Dean, we wish you all the best in your retirement. Thank you, and have a good day.

Operator, Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect.