Earnings Call Transcript - SLF Q2 2022

Yaniv Bitton, Host

Welcome to Sun Life's Earnings Call for the Second Quarter of 2022. My name is Yaniv Bitton, and I will be the host for the call today. 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, Dan Fishbein, President of Sun Life U.S., will provide an update on the DentaQuest acquisition. Manjit Singh, Executive Vice President and Chief Financial Officer, will then 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 will also be available to answer your questions this morning. Turning to slide two. 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.

Kevin Strain, CEO

Thanks, Yaniv, and good morning, everyone. Before getting to the quarter, I want to discuss the agreement we announced earlier this morning to sell our close block of business in the U.K. to Phoenix Group for approximately $385 million. The economics of the transaction relate to our U.K. Life and Pension business, which has been running as a closed block since 2001. Phoenix is the U.K.'s largest long-term savings and retirement provider. They have the scale and expertise to run closed life and pension businesses, and we're confident they will deliver exceptional client service. As part of the transaction, we will enter into a long-term strategic partnership with Phoenix to become a preferred asset management provider. MFS and SLC management will continue to manage approximately $9 billion in the U.K. general account on behalf of Phoenix. They will also become material partners to Phoenix, supporting their goal to invest approximately $25 billion in North American public and private fixed income as well as alternative investments over the next five years. Phoenix had over GBP310 billion in assets under administration as at December 31, 2021, with a strong track record of growth. In the last five years alone, their AUA has increased over 300% through both organic and inorganic growth. It's an exciting opportunity for us that’s aligned to our strategy to focus on less capital-intensive businesses in markets with natural tailwinds. The transaction also supports growth in our asset management businesses. On close, Sun Life will release capital held for the life and pension business. We estimate a LICAT benefit of 1% to 2% associated with the capital release. However, the final amount will be determined on close. Sun Life will continue to maintain our economic interest in the U.K. payout annuities business. This block of business has an attractive risk/reward profile with strong ROE and cash flows and has been optimally structured from a Sun Life capital perspective. We expect that this business will generate approximately $30 million of annual underlying net income after the transaction closes in the first half of 2023. I want to take this opportunity to thank our team in the U.K. for their passion and dedication to Sun Life. An important part of our decision-making process included finding a company where our U.K. employees could continue to grow and develop their careers, and we believe we have done so with Phoenix. Turning to slide five. We provide an overview of our second quarter financial highlights. Our diversified business mix continues to demonstrate resilience and strength. Reported net income of $785 million was down 13% year-over-year, predominantly driven by market impacts. Underlying net income of $892 million was up modestly. Manjit will discuss the quarterly financials in more detail. Overall, we saw good growth across the business despite challenging conditions. Canada had a strong quarter as disability results improved. The U.S. was also strong as COVID mortality impacts moderated, and we added approximately $10 million in earnings in the U.S. for DentaQuest. This happened after the close on June 1. These positives offset lower fee income at MFS, driven by equity markets and a relatively in-line quarter in Asia as COVID-related restrictions continue to impact the Hong Kong business. Capital also remained solid in the quarter with 128% LICAT for SLF and 124% for SLA. Slide six highlights several strategic initiatives from the quarter that support our client impact strategy. This quarter, we expanded our commitment to sustainability as SLC management's fixed income business signed up to the Net Zero Asset Managers initiative, joining previous commitments made by other SLC affiliates including BentallGreenOak, BGO and Infrared. In Malaysia, we launched the first Sharia-compliant investment-linked Takaful ESG fund. The fund provides an affordable and accessible avenue for clients to embed ESG factors in their investments. As part of distribution excellence, we renewed our bancassurance partnership in the Philippines with RCBC, one of the country's leading commercial banks. The partnership was renewed for an additional 10 years and will continue to provide RCBC clients with access to financial protection products. We also saw another quarter of strong momentum at SLC management with capital raising of $5.7 billion in the quarter. We're seeing good traction across all asset classes offered through our diverse alternative investment platform, including BGO, where investors are pivoting to debt secured by real estate to provide protection against current economic conditions. And our position as a trusted brand was recognized this past quarter by Corporate Knights Magazine, which once again included Sun Life on its list of the best 50 corporate citizens in Canada. We have appeared on the annual ranking for 17 years and the 2022 edition ranks us 21st overall, driven in part by strong scores on executive general diversity, board racial diversity and sustainability linked to executive pay. Slide seven provides highlights on our digital leadership. By focusing on digital priorities and continuing to develop our operating model, we are making great progress in our digital journey. In Canada, our digital coach, Ella, continues to help clients make better decisions, driving year-to-date increases in both wealth deposits and insurance coverage, which were up 14% and 64%, respectively, from prior year. We're also making excellent progress in the U.S. with 76% of claims submitted digitally in the quarter. And in Asia, we saw a significant increase in digital submissions of new business applications, up 13% over the prior year. I'm also excited to welcome Chris Wei to Sun Life as our Executive Vice President and Chief Client and Innovation Officer, reporting to me. Chris joins our executive team in this new global cross-enterprise role, leading Sun Life's commitment to client experience excellence. Chris will be responsible for identifying and cultivating innovative solutions focused on achieving our purpose, including establishing measurable targets while maximizing our impact to foster a sustainable society and healthier planet. He will lead our sustainability, global marketing and corporate communications functions. Chris brings more than 25 years of global leadership experience in insurance and wealth management, and we're excited to have his depth of knowledge and experience on our team. With that, I'll hand the call over to Dan to discuss the close of DentaQuest. We are excited to have DentaQuest join Sun Life's family.

Daniel Fishbein, President of Sun Life U.S.

Thanks, Kevin. I'm pleased to provide an update today on DentaQuest since closing the acquisition on June 1. With the addition of DentaQuest, Sun Life is now the second largest dental benefits provider in the U.S. by membership, and we now serve more than 50 million Americans across all of our benefits products. Combined, we expect to generate more than $7 billion in total annual U.S. benefits revenues as one of the largest providers of specialty benefits in the U.S. Over the past decade, we have transformed the U.S. business from a mostly retail individual life and annuities business to a high-performing market-leading benefits business. The DentaQuest acquisition continues this evolution, changing the footprint of our business in the U.S. into a larger, more health care-focused organization now with more than 70% of our benefits revenue coming from health care. These changes have transitioned Sun Life U.S. from a capital-intensive to a capital-light business with strong cash flow generation, from businesses with long-term risk profiles to mostly short-term risk and fee-based businesses, from slow-growth markets to higher growth markets and from ROEs in the single digits to a return on tangible equity in the high teens. The DentaQuest acquisition adds a large and growing business that aligns strongly with our risk and return profile and advances our business strategy to be a leader in health and benefits. Together, we will do even more to provide great oral health care to all and to help people live healthier lives. We welcomed 2,400 DentaQuest employees to the Sun Life family on June 1. The leadership team for the dental business is in place, consisting of a blend of DentaQuest and Sun Life leaders and is focused on growth strategies, revenue synergies and optimizing performance. We're approaching integration with great care, and our goal is to realize the full potential of the transaction for all our stakeholders, including providing enhanced offerings for clients delivering on our accretion and cost savings targets for shareholders, creating new opportunities for our employees and delivering a positive integration experience for all. We have a strong track record of successfully integrating group benefits businesses while minimizing disruption for our clients. Many of the leaders who manage the Assurant integration are involved in the DentaQuest integration. We are focused on integration activities that will support our run rate cost savings target of $60 million by 2024. We're off to a strong start with a fully integrated leadership team, engaged employees and a detailed plan for the remaining steps. This quarter, we began reporting separately on the performance of our Dental business, which includes DentaQuest, both the government and commercial segments and the existing Sun Life U.S. Dental and Vision business. The second quarter includes one month of results for DentaQuest and three months of the legacy Sun Life Dental and Vision results. I'm excited about the future at Sun Life U.S. We now have four strong businesses with market-leading positions in dental and stop-loss and a top 10 employee benefits business. Although recent results have been somewhat masked by COVID impacts, once this subsides, we remain confident in achieving our medium-term targets for the U.S., including 10% or more earnings growth for our benefits businesses. At this time, I'd like to turn the call over to Manjit.

Manjit Singh, CFO

Thank you, Dan, and good morning, everyone. Slide 11 provides an overview of our second quarter results. The results reflect the strength of our business fundamentals and the benefits of our diversified business mix amidst a challenging operating environment. Reported net income in the quarter was $785 million, down 13%, primarily driven by lower equity markets. Underlying net income of $892 million and underlying earnings per share of $1.52 were up 1% from the prior year. Good insurance sales, moderating COVID impacts, strong credit results, one month of earnings from the DentaQuest acquisition and disciplined expense management helped to offset lower asset management results. Underlying return on equity was 14.9% in the quarter. Book value per share was up 6% over the prior year. And excluding the impacts in other comprehensive income, book value per share was up 10%. We continue to maintain a solid capital position with LICAT ratios of 128% at SLF and 124% at SLA. The decline in the SLF ratio from last quarter primarily reflects the closing of the DentaQuest acquisition and market impacts in the quarter. Now let's turn to our business group performance starting on slide 13 with MFS. MFS reported net income of $228 million, up 19% from the prior year, reflecting fair value changes and outstanding share-based payment awards. Underlying net income was down 17%, driven by lower average net assets, in line with year-over-year declines in global equity markets. MFS generated a pretax net operating margin of 36%. Operating margin declined by 3 percentage points from the prior quarter due to lower average net assets, partially offset by lower variable compensation. AUM was down 13% from Q1 to $553 billion largely reflecting lower equity markets and $5.5 billion of net outflows. Net outflows in the quarter were driven by U.S. retail, reflecting significant industry-wide retail redemptions. In fact, Q2 reflected the highest level of U.S. retail industry redemptions in over 30 years. That said, MFS saw lower relative retail redemptions as a proportion of AUM compared to the industry. Institutional inflows were $1.5 billion in the quarter. Turning to slide 14. SLC Management delivered another solid quarter with reported net income of $5 million and underlying net income of $23 million. Underlying net income reflected strong growth in fee-related earnings, partially offset by real estate investment mark-to-market losses. Fee-related earnings were up 13% from the prior year, reflecting strong capital raising activity and the deployment of capital into fee-earning AUM over the past 12 months. The fee-related earnings margin of 23% was down modestly due to continued investments in business growth. Strong capital raising of $5.7 billion in the quarter reflects the diversification of our investments platform, with positive momentum across all investment strategies. Total AUM includes $21 billion that is not yet earning fees. Once invested, these assets can generate annualized fee revenue of more than $175 million. On slide 15, Canada's reported net income of $160 million was down from the prior year, mainly due to market-related impacts. Underlying net income of $344 million was up 19% from the prior year, underpinned by good business growth and favorable mortality, morbidity and credit experience. This quarter's results also include higher large case group benefit sales in Sun Life Health and solid growth in third-party insurance sales. While sales were supported by higher large case mandates in Group Retirement and Defined Benefit Solutions, partially offset by lower industry-wide retail mutual fund sales. Turning to slide 16. U.S. reported income of $167 million was up 31% from the prior year, reflecting real estate gains. Underlying net income of $121 million was up from $93 million in the prior quarter, reflecting one month of earnings from DentaQuest and more normalized group life mortality. Group life mortality significantly improved in Q2, in line with improvements in the overall population. We also saw some moderation in the favorable stop-loss morbidity experience in the quarter, but inpatient utilization remains below pre-COVID levels. Our U.S. business continues to demonstrate strong core fundamentals with solid growth in premiums and fee income, good client persistency and benefits from investments in Pinnacle Care and DentaQuest. Slide 17 outlines Asia's results for the quarter. Reported net income was $131 million, down 8% from the prior year in constant currency. Underlying net income of $148 million was down modestly on a constant currency basis. Second quarter results were impacted by lower sales in Hong Kong, driven by pandemic-related restrictions and lower equity market-related fee income. This is mostly offset by higher new business gains in our international high net worth business and while international sales were lower than the prior year, profitability of sales is up as we focus on selective origination in the high net worth market. Outside of Hong Kong and International, insurance sales grew double digits in the rest of our markets as they emerge from pandemic restrictions. Asia wealth sales were lower than the prior year, reflecting declines in global equity markets. Overall, we're pleased with our results this quarter. Sun Life's attractive mix of diversified businesses once again allowed us to deliver good performance in a challenging operating environment. The fundamentals of our business remain strong. And we are continuing to invest to drive future growth. And the investments we have made in recent transactions, including SLC Management, DentaQuest and Bancassurance in Asia are performing well and contributing to results. With that, I'll turn the call back to Yaniv for Q&A.

Yaniv Bitton, Host

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

Operator, Operator

Thank you. We will now begin the question-and-answer session. The first question comes from Meny Grauman, Scotiabank. Please go ahead.

Meny Grauman, Analyst

Hi, good morning. Question about Asia. It looks like North America is putting COVID behind, and we saw the improvement in the U.S., but in Asia, it looks like COVID-related restrictions continue to be a factor, and this quarter, we saw it in Hong Kong. I'm wondering what the outlook looks like or what you're seeing so far in Q3, but then even beyond that, do you expect any material change in COVID-related restrictions? Or is this going to be a persistent issue over the foreseeable future?

Ingrid Johnson, Executive

Thank you very much for the question. It’s Ingrid Johnson from Asia. I've actually just spent almost four weeks touring Asia and went to almost all of our markets other than India and China. And it's exactly right. The rest of Asia is actually opening up really nicely, whereas Hong Kong is still facing some of the restrictive measures as it sees a net-zero COVID policy. However, under the new Chief Executive that is being evaluated, that's very uncertain. And you're correct, we do see that implication flow through into our sales and principally also with the borders closed and the virtually zero MCV sales versus in 2016, it was at a tight $9 billion, and there was a high weighting of our competitors on that being able to write that business. So we are seeing increased competition domestically in Hong Kong. Two quarters of contraction of GDP. There's no doubt that this needs to change. We're not sure when, but we're preparing and making sure we build a really great business that's positioned to take advantage as the restrictions ease.

Meny Grauman, Analyst

If the zero COVID policy continues, are there any changes you can make to that business? So anything you're contemplating to adjust to that ongoing reality?

Ingrid Johnson, Executive

Importantly, we've also faced the market volatility that's been felt globally. So we're number two in terms of our NPS flows, we still have a very strong position overall with third position. So we're very strong in the wealth business and that we will continue. And the business is very well positioned also with a strong insurer that has good momentum. So we feel that we're well positioned with Sun Life with our global positioning that we want to strengthen our offerings in Hong Kong. So we're cautiously optimistic, and we do believe that Hong Kong will emerge at some point, and we will be well positioned to take advantage of that. And we actually remain committed to our medium-term objective of 15%.

Operator, Operator

The next question comes from Tom MacKinnon, BMO. Please go ahead.

Tom MacKinnon, Analyst

Yeah. Thank you very much, and good morning. With respect to DentaQuest, is it possible that you might be able to share with us the underlying earnings that DentaQuest contributed in the one month that you had it in the second quarter? And I have a follow-up.

Daniel Fishbein, President of Sun Life U.S.

Sure, Tom. This is Dan Fishbein. In U.S. dollars, the underlying earnings for DentaQuest in the one month was $10 million.

Tom MacKinnon, Analyst

Thank you. I have a follow-up regarding corporate. I'm curious about the trend there. There was an underlying earnings loss of $35 million, which is significantly higher compared to last year. I assume this is due to increased debt. How do you see this trending until the closure of the U.K. block? Once the U.K. block closes, I anticipate another $40 million loss in annual earnings. Would this also be reflected in the corporate block? I’d appreciate any additional details. Thank you.

Manjit Singh, CFO

Good morning, Tom, it's Manjit. The corporate earnings included several factors, so they fluctuate a bit from quarter to quarter. This quarter, we experienced favorable expense outcomes, primarily in the corporate segment, which is reflected in this quarter's results. Regarding your point, once the transaction closes, you will see a decrease in the earnings for the business we sold, which we noted in our slides would amount to around $40 million on an annual basis.

Tom MacKinnon, Analyst

That's right. And I think you had mentioned before that after dividends and investment in the business, that you generate excess capital of about $1 billion annually. Does that change at all with this divestiture?

Manjit Singh, CFO

No, I don't think that changes materially with the divestiture. As we said, the $40 million is a relatively small number. And as you know, as part of the transaction, we are freeing up capital and obviously, we will use that capital to generate additional earnings.

Kevin Strain, CEO

And Tom, it's Kevin. Of course, we've also entered a strategic management partnership with Phoenix, and we expect that we will get a good chunk of the $25 billion they're planning to deploy over the next five years into the North American sort of asset management space, and that will provide an income stream that will make up some of the lost revenue. So deploying the capital we get back and also the asset management agreement are in combination, I think, a good support to the earnings.

Tom MacKinnon, Analyst

Okay. And how much do you expect to receive from that $25 billion?

Kevin Strain, CEO

It's expected that this will develop over the next five years, possibly emerging in stages during that time. As Steve mentioned in his slides, we anticipate a combination of public fixed income and alternative asset management from our alternatives. While it's challenging to pinpoint an exact timeline, there is a process and fiduciary duty involved in bringing these on board. Earnings are expected to materialize, which we believe will compensate significantly for what we've lost. Additionally, it’s important to note that we have a closed block. For the life and pension business we sold, we foresee a notable decline in the next five to seven years. In contrast, we expect the paid annuity business we retain to remain quite stable in terms of earnings and cash flow.

Tom MacKinnon, Analyst

Okay. Thanks for that.

Operator, Operator

The next question comes from Scott Chan with Canaccord Genuity. Please go ahead.

Scott Chan, Analyst

Good morning. My question is actually a follow-up to Tom on DentaQuest. I know it's one month, but Dan, is there any seasonal impact on that business or like a $120 million annual run rate is kind of what we're looking for?

Daniel Fishbein, President of Sun Life U.S.

Yes. Good morning. I would caution that one month is not necessarily a trend. And so multiplying one month by 12 is always a little tricky. What I can say is we're still confident in the accretion projections that we made when we announced the transaction, and certainly, the results in June would support that. We did see a little higher margins in June than perhaps we expected and a little lower revenues, but the higher margins were more than made up for the small variance in revenues. But overall, I think the comment we would make is at least this first month gives us confidence in our prior projections.

Scott Chan, Analyst

And if I take that first month and just annualize it and just do a quick math, it seems your earnings power substantially is lower than when you announced the deal and could be some risk to that EPS accretion targets? Or is that not the case?

Daniel Fishbein, President of Sun Life U.S.

No, that's not the case. The accretion target we announced would actually translate to a number a little bit lower than the June number.

Operator, Operator

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

Doug Young, Analyst

Hi. Good morning. Dan, on the U.S. group insurance business, underlying earnings were down year-over-year, and I know there's puts and takes in here, but ultimately, I'm just hoping you can flesh out some of those puts and takes when we look at that. And I know the LTM margin was 4.7%. I know you're targeting 7% plus. I know potential Envision business has been stripped out. So it's not really comparable. I'm just wondering, is there a new target for the margin for that U.S. group insurance business you can share with us?

Daniel Fishbein, President of Sun Life U.S.

Sure. I have a few questions. First, regarding the group earnings or group benefits earnings compared to the same quarter last year, your observation is accurate. The main factor is that in the second quarter of last year, we had exceptionally strong stop-loss results. While we continue to see solid stop-loss results this quarter, they are not as outstanding as last year. Additionally, we had a very strong quarter in long-term disability last year, but that performance was weaker this quarter. These are the key factors to consider. Keep in mind that we report our metrics on a rolling 12-month or rolling four-quarter basis. Thus, what you're seeing reflects several prior quarters. The current quarter itself was strong, although it is compared to an exceptionally strong quarter last year. We essentially transitioned from a very robust quarter to one that is not quite as strong this year, but this four-quarter metric will improve over time. Regarding our margin target, dental insurance used to represent a very small part of our business, but now with the inclusion of DentaQuest, it becomes a significant component. However, we've concluded that margin is not the most useful way to evaluate the dental segment, especially when compared to other group businesses. The dental business typically has lower margins but high returns on equity due to requiring less capital than other group sectors. Therefore, we will report dental separately and likely use different metrics for that segment. For our remaining group business, our margin target remains unchanged at 7% or higher.

Doug Young, Analyst

When considering how to move from 4.7% back up to 7%, do you think it's more related to the group life benefit and health business, or is it more about stop-loss? Where do you see the stop-loss trend—still above 7% but decreasing while group life and health increase? Has there been any change in that dynamic?

Daniel Fishbein, President of Sun Life U.S.

No. The stop-loss remains above while the group is still below. Although the incidence of COVID has improved significantly, there are still some ongoing impacts in the business. You can observe some of this in long-term disability, and particularly over the past four quarters, there continues to be a notable effect on mortality. We might see stop-loss gradually decrease as some of the advantages from delayed care lessen. However, we anticipate that group life and group disability will increase as the impacts of COVID diminish.

Doug Young, Analyst

Okay. And just second, Kevin, on the sale of the U.K. I guess the question was why we retain the annuity business. I think you covered a little bit about that. But is this also a play on you want to keep longevity to offset the build-out of the life insurance business? And when you think about deploying capital, can you remind us what you're focused on? And from an acquisition perspective, what are you focused on?

Kevin Strain, CEO

Thank you, Doug. We are pleased with the risk profile of the business, and we have tailored it to fit our portfolio. With IFRS-17, we anticipate a modest growth trend in earnings over the next decade. The earnings are projected to return nearly 100% or possibly exceed that in cash flow, providing a strong return on equity. We appreciate the risk profile and structure of the business, as it aligns with our three medium-term objectives. When considering M&A, our focus is on whether an acquisition or disposition enhances our strategy, adds capabilities or scale, contributes to our medium-term goals, supports earnings growth, aligns with our return on equity targets, and generates cash flow. Additionally, we assess our ability to successfully execute the transaction. We have invested capital in line with these criteria recently. You have heard Dan mention DentaQuest, but we have also benefited from integrating the SLC businesses and expanding bancassurance in Asia. Ultimately, we are focused on enhancing our strategic direction, achieving our medium-term goals, and ensuring successful integration.

David Motemaden, Analyst

Hi. Thanks. Good morning. I had a question just on the U.K. business, on the bit that was retained. Could you just describe, I guess, why you are retaining that? Is that something you could consider, exploring something similar with a transaction on in the past? Or is there something about it that made it that Phoenix didn't take? Maybe just some color on why you didn't sell the remaining business as opposed to retaining the annuity business would be helpful.

Kevin Strain, CEO

David, we have optimized this business to align with our operations and capital structure. As I mentioned, we appreciate the risk profile, which fits well with our strategy. We are also satisfied with the earnings, cash flow, and return on equity generated from it. Overall, during the transaction, we determined it was more beneficial to keep it rather than sell. It did not hinder our ability to secure an effective asset management agreement, and we believe we received a very favorable price from Phoenix for the portions we sold. We were actually quite pleased to retain this aspect, and this decision was primarily driven by us rather than Phoenix.

Manjit Singh, CFO

Yes. And the other thing I would add, if we look at the returns on this business, given Kevin's comments about how we structured it, is 20% plus. So we're very happy with the returns we're getting on that business.

David Motemaden, Analyst

Okay. Great. And then maybe just taking a step back, and I think in the past, it didn't sound like you guys were in a rush or had really focused on trying to do something more strategic in the U.S. on that in-force management business. Has that changed? Does this transaction that you did with Phoenix on the U.K. was that more of a one-off to get the asset management agreement? Or is this something a broader initiative that you guys are starting to think about in terms of just getting maybe potentially offloading or doing something more strategic with the in-force management business?

Kevin Strain, CEO

David, it's Kevin again. If you looked at the life and pension business that we sold, again, that bought closed in 2001, and we were expecting income to start to decline and cash flow to decline. And at some point, you start to lack scale. In the IFM business in the U.S., we like the earnings profile. We like the ROE coming out, and we like the cash flow coming out of that business. It also supports our asset management business, right? So it gives us asset management to provide to SLC. And so we think that's a positive. So at this point in time, I would say that the IFM business is a bit like the payout business in the U.S. We like the profile of it. We like the earnings and the cash flow coming out, and the ROE. And so that's how we're thinking about that. If you watch, there are a number of asset management companies that are buying these closed blocks for the cash flow. And so that's strategic for us to provide that cash flow back to SLC as well.

Paul Holden, Analyst

Hi. Good morning. I want to go back to the U.S. group business because there's just been a lot of moving pieces over the last year, 1.5 years. And you mentioned targeting sort of a 10% organic growth rate in that business. Is there anything today that would suggest to us that the growth rate could be higher than 10%, just given the extent to which you're growing stop-loss, the price increases you've been pushing through? Or maybe there's factors that would suggest don't get too excited, maybe it's going to be a little bit less than 10% in the near term? Maybe you can talk through some of those dynamics for us.

Daniel Fishbein, President of Sun Life U.S.

I'm always looking forward to the future with optimism. You may have seen that even without DentaQuest and Pinnacle Care, the premium and fee revenue in the U.S. increased by 10% over the past year. This signifies that we are achieving significant organic growth, which should also lead to earnings growth. DentaQuest has historically been a growth driver, experiencing periods of rapid expansion. However, we should approach this with some caution as it represents a new area for us. Their business tends to be variable, with fewer contracts that are very large in size. Consequently, there may be periods of substantial growth from just a couple of significant contracts, followed by delays. Nevertheless, we believe DentaQuest has considerable potential across various fronts, including winning new Medicaid government contracts, expanding in Medicare Advantage, and integrating their capabilities with our existing ones to create a top-tier commercial dental business. This segment has the capacity for strong growth. Additionally, as you have seen over the years, our stop-loss segment has been growing steadily, and we are the industry leader in that area. As we move past COVID, we are very optimistic about our opportunities in the group business. After a few years of stagnation, this segment has started to see organic growth over the last 1.5 years. Therefore, we are confident in our 10% growth outlook and believe there may be even more potential.

Michael Roberge, MFS CEO

Good morning. This is Mike. I think the institutional flows do tend to be somewhat lumpy, and there were just a number of wins that funded in the quarter. Some of that would have been rebalancing. But I think it was just activity at the client level where we lined up well with those particular opportunities, and they happened to fund in that particular quarter. So that's really what drove. That's sort of the color behind the institutional flows.

Paul Holden, Analyst

Okay. And then just quick follow-up. I mean, is there any sense you can give us given the current pipeline today and where things might land in the future?

Michael Roberge, MFS CEO

Yes. I mean we don't comment on what pipeline looks like and what we think the future looks like. All I would say is we expect institutional flows quarter-to-quarter to be relatively lumpy based on what clients are doing and the size of the mandates that they're putting out. So I'm not comfortable giving a forecast.

Nigel D'Souza, Analyst

Thank you. Good morning. I wanted to follow up on experience and specifically on the expense side. As mentioned earlier, the delta year-over-year on expenses is pretty significant. And I'm wondering if you could flesh out the impact there on variable versus fixed costs. You mentioned share-based comp is that what’s driving the majority of it. On the fixed side, could you touch on the outlook in an inflationary environment? Do you expect to keep costs below your assumptions? Or should we expect over the medium term, an unfavorable revision to your expense outlook or less favorable expense experience as inflation weighs on your results?

Manjit Singh, CFO

Good morning, Nigel, it's Manjit. Regarding the expense composition for the quarter, I would estimate that about two-thirds were related to variable compensation as I mentioned earlier. In terms of inflation, we are experiencing some general impacts similar to those in the overall market, but not at the headline levels of 9% or 10% often reported in the media. The pressure is more localized in certain areas like technology and data specialists. However, as I noted earlier, we also have opportunities to reduce expenses through productivity initiatives. We have been doing that for many years and will continue to focus on it. Overall, we believe we can manage our expenses effectively, keeping them in line with our revenue growth.

Kevin Morrissey, Senior VP

Sure. Nigel, it's Kevin Morrissey. The investment activity, as you know, is very strong again this quarter. You had gains of about $36 million. There's a number of different factors that impact that in addition to the flows and the market environment, I'd say that we positioned our portfolio to have a certain amount of reserve to take advantage of favorable market conditions, and you're seeing some of that coming through in the quarter. It also has to do with kind of the deals that we're doing and the flows of those vis-a-vis the size of our business in each quarter depending on how much we're backing against new business and how much we're back in an in-force. So I'd say that our outlook continues to be favorable relative to our $10 million to $20 million per quarter guidance.

Yaniv Bitton, Host

We have no further questions at this time, and I will turn things over to Mr. Bitton for closing remarks.

Kevin Strain, CEO

Thanks, Yaniv. We remain focused on our purpose and our strategy. Our diversified mix of business, strong risk management, balance sheet strength, and capital position are helping us managing through what's clearly challenging times. You can see steps across each pillar and across all elements of our strategy that continue to move the business forward. The close of DentaQuest, our strategic partnership with Phoenix, renewing our distribution relationships with RCBC, and gaining traction on sustainability and digital leadership were all steps we took in the quarter to continue delivering for our clients, our employees and our shareholders. I want to thank everybody for joining the call and wish you all a great rest of the summer.