Earnings Call Transcript - SLF Q3 2022

Operator, Operator

Good morning, and welcome to the Sun Life Financial Q3 2022 Conference Call. My name is Michelle, and I will be your conference operator today. The call will be hosted by Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton.

Yaniv Bitton, VP, Head of Investor Relations and Capital Markets

Thank you, operator, and good morning, everyone. Welcome to Sun Life's Earnings Call for the Third Quarter of 2022. 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, 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 are also available to answer your questions this morning. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Kevin.

Kevin Strain, President and CEO

Thanks, Yaniv, and good morning, everyone. Turning to Slide 4. We delivered strong third quarter results, reflecting our diversified businesses' ability to deliver underlying earnings and top-line growth even in a challenging environment. We saw the U.S. have strong sales results and almost double underlying earnings from last year with the addition of DentaQuest, strong Health and Risk Solutions results, and a significant moderation of COVID-related impacts. Asia grew insurance top line and underlying earnings as most of our markets began to emerge from COVID restrictions, and we executed well on our growth strategies. Canada also delivered a strong result for the quarter, including strong insurance sales. SLC Management had strong flows as alternative assets continued to attract commitments. MFS continued to deliver on their strategy but saw AUM and earnings decline along with outflows as markets fell. Overall, declines in equity markets impacted our fee income across MFS and our other equity-sensitive businesses, including GRS and SLGI in Canada and asset management across Asia. Interest rates are also impacting us as central banks continue to fight inflation by raising rates. Our LICAT ratio remained at a solid 129% during the quarter despite negative year-to-date impacts related to the rapidly rising interest rates. Reported net income of $466 million for the quarter was down 54% year-over-year due to market volatility, the write-down of goodwill in the U.K., and an increase at SLC Management of put liabilities. Underlying net income of $949 million was up 5% with strong U.S., Asia, and Canada earnings. These strong results driven by our protection and health businesses were offset by lower income in wealth and asset management, which were impacted by declines in global equity markets. Our asset management businesses have strong fundamentals, focused on delivering strong performance and returns to our clients. MFS is a top 10 equity manager in the U.S. retail space with a long track record of performance. SLC Management, our alternative asset manager, continues to generate strong flows and crossed $200 billion of assets under management in the quarter. Underlying return on equity of 15.5% reflected strong earnings in the quarter, approaching our medium-term objective of 16% plus. As mentioned earlier, capital also remained solid in the quarter, and we were pleased to announce a $0.03 increase to our common share dividend. Slide 5 provides just a few examples of business initiatives that drove our client impact strategy in the third quarter. In September, we announced our intention to acquire a majority stake in Advisors Asset Management, or AAM, a leading independent U.S. retail distribution firm. AAM will become the U.S. alternatives retail distribution arm of SLC Management, providing an important new channel in the U.S. high net worth market. We also announced the sale of our U.K. business to Phoenix and struck an asset management partnership with them, which we believe will be an important driver of flows for both MFS and SLC Management. We are enhancing and expanding our offerings for high net worth clients in Asia. This quarter, we launched Sun Global Aurora, a savings-oriented indexed universal life product. InfraRed Capital Partners, our global infrastructure investment manager, received 5-star ratings in the latest principles for responsible investment assessment. This is the seventh consecutive time that InfraRed has achieved the highest possible PRI rating for integration of ESG throughout its infrastructure investment practices. Additionally, DentaQuest announced a new program with a partner's health plan, a nonprofit managed care organization serving individuals with intellectual and developmental disabilities. This partnership will increase access to oral care and help improve outcomes for this underserved community, thereby increasing health equity for all. In September, Sun Life Health launched a new surrogacy and adoption benefit in Canada, recognizing that people grow their families in different ways. Slide 6 showcases digital highlights from the quarter. We continue to make great strides on our digital journey and have clearly seen the positive impact we can have in providing excellent client, employer, adviser, and partner digital experiences. These are important steps as we begin to think and act more like a digital company. As a leader in health and benefits in the U.S., we're helping clients access the right care at the right time through our new partnership with AbleTo, a virtual behavioral health therapy, and coaching program for disability and critical illness members being treated for cancer. We know that medical outcomes can be improved when people can manage their mental wellness at the same time as their physical recovery. In Canada, we launched a new voluntary benefit eApp where Group benefits clients can now purchase life, critical illness, and accidental death insurance coverage in one place at a competitive group rate. The medical underwriting health questionnaire has been revamped and written in simple, clear language. These enhancements are already having an impact by reducing the application process for clients by up to 50%. This is a great example of how we're leveraging digital capabilities to make it easier for our clients to do business with us and achieve their health and financial security goals. Sun Life Canada was recently recognized as one of the best workplaces for mental wellness by Great Places to Work. This recognition highlights the importance we place on mental health. Our goal is to ensure that all of our employees experience Sun Life as a safe place to work, and we strive to empower employees to achieve optimal mental well-being fostered by a culture that values diversity, equity, and inclusion. We know that giving employees everything they need to flourish helps them bring their best selves to work every day, and we're proud to offer a suite of programs and initiatives to support mental and physical well-being. I'm proud of how the business continues to perform during these challenging conditions. Our strong performance is driven by our people and culture and our passion for helping clients achieve lifetime financial security and live healthier lives. With that, I'll hand the call over to Manjit, who will walk us through the third quarter results.

Manjit Singh, CFO

Thank you, Kevin, and good morning, everyone. Slide 8 provides an overview of our third quarter results. The results reflect the strength of our businesses and the benefits of our diversified business mix. Reported net income for the quarter was $466 million, driven by strong underlying earnings, partially offset by market-related impacts, our charge to write off goodwill related to the sale of our U.K. business, an increase in acquisition-related liabilities in SLC Management, and lower ACMA gains compared to the prior year. Overall, our annual actuarial review resulted in a relatively neutral ACMA impact of $7 million. Underlying net income of $949 million and underlying earnings per share of $1.62 were up 5% from the prior year. Strong growth in protection and health businesses, including moderating COVID-related impacts and a full quarter of contribution from DentaQuest, more than offset lower wealth and asset management results. Underlying return on equity was strong at 15.5% for the quarter. Book value per share was up 6% over the prior year. Excluding impacts and other comprehensive income, book value per share was up 7%. We continue to maintain a solid capital position with LICAT ratios of 129% at SLF and 123% at SLA. The Q3 leverage ratio was 26.4%. With the announced redemption of $400 million of subordinated debt in Q4, pro forma leverage is 25.6% and SLF LICAT ratio is 127%. Now let's turn to our business group performance starting on Slide 10 with MFS. MFS reported net income of USD 240 million, up 7% from the prior year, reflecting fair value changes on outstanding share-based payment awards. Underlying net income of USD 212 million was down 18%, driven by lower average net assets, largely reflecting declines in global equity markets. MFS generated a pretax net operating margin of 41%. The operating margin increased by 5 percentage points from the prior quarter, primarily due to seasonally higher incentive compensation in Q2. AUM of USD 509 billion was down 8% from Q2, largely reflecting lower equity markets and USD 10.3 billion of net outflows. Retail net outflows of USD 5.2 billion in the quarter were impacted by slower sales activity as investors remained on the sidelines in an uncertain macroeconomic environment. That said, retail redemption rates have improved versus the first half of the year, and MFS continued to experience lower U.S. retail redemptions as a proportion of AUM compared to the industry. Institutional net outflows were USD 5.1 billion. Turning to Slide 11, SLC Management had a reported net loss of $97 million and underlying net income of $20 million. Reported earnings reflect an $80 million charge to increase the SLC Management acquisition-related liabilities. The increase reflects an update of the probability-weighted outcomes that are used to estimate the liability at the maturity of the put/call in 2026. We plan to update these liabilities around this time of the year in conjunction with our strategic planning process. Underlying net income of $20 million at SLC Management was down $15 million year-over-year, reflecting investment gains in the prior year as well as continued investments in the business. Fee-related earnings were up 12% from the prior year, reflecting higher fee income driven by strong capital-raising activity and the deployment of capital into fee-earning AUM. Capital raising of $3.8 billion in the quarter was driven by positive inflows across all asset classes. Total AUM includes approximately $22 billion that is not yet earning fees. Once invested, these assets will generate annualized fee revenue of more than $180 million. On Slide 12, Canada's reported net income of $210 million was down from the prior year, mainly due to market-related impacts. Underlying net income of $300 million was up 3% from the prior year, driven by strong investment gains and business growth partially offset by lower wealth management fee income. Protection and health businesses saw continued momentum with strong par sales in individual insurance and growth in Sun Life Health sales, while sales were lower year-over-year driven by weaker retail investor activity. Turning to Slide 13, U.S. reported net income of USD 72 million was up USD 35 million from the prior year, and underlying net income of USD 166 million was up USD 78 million. The results were driven by strong group benefits performance and a full quarter of DentaQuest contribution. We are very pleased with the DentaQuest results this quarter, which were our expectations. We are making good progress on our integration milestones and are confident that we will meet the earnings and expense synergies that we outlined last year. Group Benefit earnings reflected the strong business fundamentals we have highlighted in prior quarters. This includes good client persistency, growing premiums, and solid stop-loss pricing margins. The results also include a significant moderation of COVID-related mortality and disability impacts. Sales growth in the U.S. was strong, up 78% year-over-year and up 14%, excluding contribution from Dental. As a reminder, going forward, Dental sales can be highly variable quarter-to-quarter due to longer sales cycles and larger contracts in the government program space. Overall, following the DentaQuest acquisition, more than 70% of our annual benefits revenue in the U.S. will be generated by healthcare businesses, which have shorter terms and generate higher returns. Slide 14 outlines Asia's results for the quarter. Reported net income was $125 million, down 55% year-over-year in constant currency as the prior year included a large ACMA gain compared to reserve strengthening this quarter. Underlying net income of $175 million was up 23% year-over-year on a constant currency basis. The strong result was driven by improved mortality, moderating COVID-related experience, and favorable investing gains. Our joint ventures in Asia also contributed to the year-over-year growth, including favorable mortality in India and improved policyholder and investment experience in China. Wealth earnings were down, reflecting lower equity markets. Asia reported double-digit insurance sales growth in nearly every market, and we're seeing strong momentum as restrictions are lifted, new products gain traction in the respective markets and the rollout of new digital capabilities. Overall, we are pleased with the third quarter results. Throughout a period of significant volatility over the last few years, Sun Life's underlying earnings have remained resilient. As we look ahead, we expect the near-term operating environment to remain challenging. We believe our diversified business model, established business leadership positions, strong talent, and prudent risk management will be key strengths in managing through this environment. With that, I'll turn the call back to you, Yaniv, for Q&A.

Yaniv Bitton, VP, Head of Investor Relations and Capital Markets

Thank you, Manjit. To help ensure that all our participants have an opportunity to ask questions this morning, please limit yourselves to 1 or 2 questions and then requeue with any additional questions. I will now ask the operator to pull the participants.

Operator, Operator

Your first question comes from Scott Chan with Canaccord Genuity.

Scott Chan, Analyst

My questions are on MFS. Manjit, you talked about the gross redemptions on our platform being better than the industry. But when I look at the gross sales, that seems to be more the issue last 2 quarters down materially sequentially. So just wondering if there's any kind of color on the gross sales picture there? Is it performance issues? Is it products being overweight equity? Any color would be kind of helpful looking forward.

Manjit Singh, CFO

We'll hand that over to Mike, Scott.

Michael Roberge, CEO, MFS

Scott, it's Mike Roberge. Yes, if you look at the industry, what's happening is sales are down dramatically across all product types. We see that across equity, we see that across fixed income product types. And so when you look at our share of outflows. Again, sales — net as a function of sales and then what clients are doing on the redemption side, we control sales. But on the net side, when you look at our net flows in the industry relative to our assets, our share of active assets, we're generating less outflows than the industry is relative. And that's — so the way that we're looking at it is sales are tough right now, clearly, with the volatility of the markets. We think that they're going to stay tough for some period of time until the Fed gets to sort of the end of the cycle and volatility comes down and people can look through the other side of the economic slowdown. And so we think we're holding our own relative to the industry, but the dynamics are pretty challenging right now in the retail industry.

Scott Chan, Analyst

And if I can sneak in one more big picture question on asset management, maybe for Kevin or Mike. Like clearly MFS' challenges on the traditional side and SLC on the alternative side is doing quite well specifically at your firm. Is there anything down the road where you could do something together amongst the groups like in terms of product cross-selling? Or is any of that being done right now? Or is that something that you're just going to kind of leave separate for now?

Kevin Strain, President and CEO

Well, Scott, we announced the Phoenix transaction earlier this quarter, and that's an area where both MFS and SLC will be fund managers. For Phoenix, they were both part of the strategic partnership. Of course, as we think about flows, Steve and Mike talk about things, but they're very different asset classes. MFS is, of course, in the public equity and fixed income and Steve has across the alternative space. So there are obviously discussions that happen across both, but they are run as separate entities.

Operator, Operator

Your next question comes from Tom MacKinnon with BMO.

Tom MacKinnon, Analyst

Just one question with — or two questions. The first is on — if we look at the impact of new business, especially in Canada, we had — seemed to have some better sales at least in individual insurance, but the impact of new business is down significantly. Was that largely just due to DB Solutions sales being down? And maybe if that's the case, then what's the outlook for DB Solutions sales going forward, just given the interest rate environment and the macro environment as well? And then I have a follow-up.

Jacques Goulet, President, Sun Life Canada

Tom, this is Jacques. Let me start with that. New business gains are down, and you've identified it. If you remember, Q3 2021, we had good sales in Defined Benefit Solutions. We've got good sales this quarter, but not nearly as good as last time. That's the main driver. Individual insurance is — the sales are up, but the mix is less favorable. There is more participating insurance that doesn't generate as much business gains. In terms of the outlook in Defined Benefit Solutions, as you know, the key metric there where clients execute or not, an annuity buyout is their funded ratio. Funded ratios remain fairly healthy. The pipeline going into Q4 is looking very strong right now. I've said many times before that this is a growth market for us. When we compare it to other jurisdictions that are way ahead, whether it's the U.S. or U.K., it's still a relatively nascent market. We've got a great team of actuaries, and we tend to do very well particularly in innovative and complex deals. So we're quite confident about the growth potential of DB Solutions going forward.

Tom MacKinnon, Analyst

Well, that's great. And the follow-up question is, if I look at the earnings on the surplus, the investment income component of that, the first quarter was $90 million; second was $122 million; third quarter, $163 million. Like I mean what — interest rates must be helping, but maybe you can give a little bit more color because as your longer term, you wouldn't — these things wouldn't necessarily be mark-to-market. There's no gains. This is just strictly keep on clipping. So maybe talk about what you've got here and what the outlook would be for earnings — the investment income component of earnings on surplus as interest rates rise.

Manjit Singh, CFO

Thank you for your question, Tom. It's Manjit. Yes. So you're right. The main factor driving that growth in investment income has been the significant increase we've seen in interest rates throughout the year, and that does take a little bit of time to work its way through. But really, you saw significant increases in Q2 and the first part of Q3 that helped to drive that quarter-over-quarter increase. Now there are a few other components within the earnings on surplus like available-for-sale gains and other impacts that can affect securities, but those are more moderate and can shift a little bit from quarter-to-quarter. But the big impact was the impact from the interest rate increases.

Tom MacKinnon, Analyst

So — but if you were invested in longer-term bonds, you just clipped the same coupon; there's no market value impact here. So is anything unique about what you're invested in?

Manjit Singh, CFO

Yes, we do have a fair bit of short-term instruments and some floating-rate assets as well. So as short-term interest rates go up, you do get an increase in the investment income.

Tom MacKinnon, Analyst

Okay. And if I could just squeeze one quick one in. Just with respect to morbidity, the outlook in the U.S. seems to be improving significantly. How should we be looking at that going forward? You had some troubles before. We've got an uncertain economic environment. Is breakeven best, because the quarter seemed to suggest that it would be better than that?

Daniel Fishbein, President, Group Benefits

It's Dan Fishbein. So on morbidity, there are different parts to this. First of all, the biggest positive impact in the quarter certainly continued to come from our stop-loss business, where experience was still quite strong. That's mostly due to good pricing and underwriting. There's also a bit of benefit from lower utilization in hospitals due to COVID impacts, which made capacity in hospitals less available, but most of the impact came from underwriting and pricing. Then in our disability businesses, we did see a more direct reduction from COVID incidents in the quarter. Sequentially, STD and LTD experience was somewhat better. Obviously, we're coming off of what was a very difficult Q4 and Q1 in terms of COVID incidents. And of course, disability claims can last a while. They tend to — some of those, obviously, still related to earlier incidents. But both of those — we hope that LTD and STD incidents will continue to improve, and we're confident that the stop-loss morbidity is strong and is mostly related to our actions.

Operator, Operator

Your next question comes from Meny Grauman with Scotiabank.

Meny Grauman, Analyst

A question on the U.S. Certainly, overall resilience is definitely a hallmark of the results this quarter, but I wanted to understand better the downside risks from recession in the U.S. as we look out to 2023. It's something we've talked about before but wanted to revisit it in terms of the implications for the U.S. business. Specifically, the vulnerability really, if we need to see a big spike in the unemployment rates for that business to be impacted. Presumably, the Group Benefits business is more at risk than the Dental business. I wanted to understand some of the dynamics in terms of thinking through downside economic scenarios in the U.S. for your business next year.

Daniel Fishbein, President, Group Benefits

Sure, Meny. This is Dan again. A few thoughts on that. First of all, obviously, the biggest economic impact we're seeing right now is inflation. In the U.S. Benefits business, inflation tends to give a boost to results. Many of the benefits we offer are based on wages. So as wages go up, the volumes go up as well. Also, in a very tight job environment, we find that employers are very interested in providing very attractive and competitive benefits. So that's driving up the uptake rates and the amount of benefits being offered. If we end up in a recessionary environment, one of the things we typically see is some uptick in long-term disability incidents. However, historically, that takes a few years to play out, but that's certainly one thing we would have to watch closely. As far as the recession causing some reduction in benefits, what we're finding coming out of the worst of the pandemic is that both employers and employees value benefits even more than they did before the pandemic. We think those trends will continue. So benefits are one of the last things we think that employers and employees would move away from. So we're less concerned about volume. But of course, as always, if there is a recession, there might be some pressure on LTD incidents.

Meny Grauman, Analyst

And then just as a follow-up in the Group Benefits business in particular, we talked a lot about the after-tax profit margin, and you reiterated the 7% guidance last quarter. Just wondering how that — we don't really have a good history for that measure. But based on your experience, what could that profit margin look like in a recessionary scenario? Is there any way to kind of approach that question from your perspective?

Daniel Fishbein, President, Group Benefits

Yes. I think that's really hard to say. Again, based on the comments I just gave, there would be some pressure on LTD, but not necessarily in other areas. I would point out that the profit margin is a 4-quarter trailing indicator. So as we drop off some of the prior weak quarters from last Q4, last Q1, we'll see that go up. But in terms of what would happen in a recession, it's very hard to predict.

Operator, Operator

Your next question comes from Mario Mendonca with TD Securities.

Mario Mendonca, Analyst

Manjit, my first question is a little bit accounting-intensive, but I want to understand how those SLC acquisition liabilities that were booked in the quarter. How do those liabilities eventually come off the balance sheet? Are they — is there an actual payment that's made? Or is it offset against some other accounting items? Can you help me understand that?

Manjit Singh, CFO

Sure, Mario. You're right. So we're accruing for what we think the liability will be at the maturity in 2025 and 2026 when we have the put option or call option. Once we exercise that, the liability will come up and the offset will be a cash payment.

Mario Mendonca, Analyst

Yes. So the liability never flows back into earnings in any way. It's actually a payment.

Manjit Singh, CFO

Correct.

Mario Mendonca, Analyst

Okay. The other thing I wanted to just quickly touch on then is — and this is more something that just impresses me with MFS. I appreciate there's a challenge here, but I've been kind of surprised by how quickly the expenses have ratcheted down. What are we seeing there? Is that simply just that commissions have really fallen as gross sales have fallen? Or are there other activities? Is there just a lot more of a variable component here that I may not be appreciating?

Michael Roberge, CEO, MFS

Hey, Manjit, I'll take that. It's Mike Roberge. If you look at our cost base, 70% of our costs are fairly formulaic and that the compensation pool flexes down with profitability in an environment like this. Asset-based payments we pay to dealers flex down as assets come down, and in a tougher sales environment, sales commissions will come down as well. And so we prefer to pay up sales commissions even in a tougher environment, but that's not the environment that we're in now. There's a fairly variable component to our expense base, which obviously helps, although there's some negative operating leverage in the business because we do have some fixed costs even as we make our way through the cycle.

Mario Mendonca, Analyst

But that's actually the observation I was making that the company is actually generating positive operating leverage despite everything that's going on. So it just seems so odd to see.

Michael Roberge, CEO, MFS

But if you look — you've got to look at it year-over-year. As Manjit mentioned, we do have — if you look at quarter-over-quarter, you have the seasonality in the first half of the year where we amortize long-term stock compensation. If you look at the last year-over-year third quarter, ANA down 17%, pretax down 18%. So it has flexed downward. There are a couple of offsets to that interest income being one of them which has helped us as interest rates have gone up. But effectively, if you look at it year-on-year, you're going to see profitability tends to follow what ANA is.

Operator, Operator

Your next question comes from Doug Young with Desjardins.

Doug Young, Analyst

Just wanted to go to Asia and look at the new business losses. And you pointed out that sales were strong in all of the regions. I think Manjit, you mentioned that in your comments. But we're not — and obviously, interest rates have been moving higher, but we're seeing a deterioration in new business losses, not an improvement. I'm just wondering what the mechanics are and why that is unfolding. And then in the same vein on Asia, underlying earnings up 23% constant FX. Can you break out how much of that was driven by local markets versus international on an underlying basis?

Ingrid Johnson, President, Sun Life Asia

It's Ingrid Johnson here. So to your question on new business strain, if you look actually previous year on this year, it's a small $3 million down, and that's really a function of international where the sales are lumpy, so we wouldn't necessarily have that come through every quarter. We're also investing in the business as we build scale. So you would see strong insurance, but also then reinvestments, particularly on the digital side. If I then move just to the local markets versus hubs, I'd rather actually just deal through each of the individual businesses because what you'll see in a hub, which is a Hong Kong, Mainland China as well as high net worth, that is effectively either through selective origination, where you would see some variability in the sales but much more positive on new business gains as we make sure we have positive net VNB. From a China perspective, still constrained in the cross-border MCV fix, but yet within China, we're seeing good momentum, particularly in Hong Kong which was very encouraging with the emergence of sales but off a very weak prior year quarter. Again, absence of Mainland Chinese visitors, but some good product innovation that we've seen good take-up, albeit slightly less profitable mix. From the local markets, also extremely encouraging. You see very strong momentum on all the sales even in Indonesia, where we've seen strong banker growth. So that is a common theme across all of our markets, including India, China, Malaysia, and Indonesia. The other important aspect is the focus on specific client segments where we've enhanced the case size. So that's flowing through into our underlying net income. So insurance income is clearly showing the benefits of emergence from the pandemic. However, wealth is similar to, as Mike Roberge described, we're seeing those same effects in Asia where there's a risk of mindset and a flow away from money market funds to more competitive bank products. So we see that flow comes through in underlying net income as adverse. That's the cycle we're in.

Doug Young, Analyst

And maybe just to simplify it, are you seeing new business gains in international and new business losses in local markets? Is that — can I make that inference? Or is that not the case?

Ingrid Johnson, President, Sun Life Asia

I think it's driven by a multiplicity of factors because international will be focused on new business gains. Otherwise, we wouldn't wish to write the business. You're going to see more of an adverse in some of the other markets where we are investing.

Doug Young, Analyst

Okay. And then just on — just on the underlying earnings, when we look at international versus local markets, like any sense of drill down on is more of that underlying earnings coming from the international side because of those new business gains?

Ingrid Johnson, President, Sun Life Asia

International is definitely more profitable, which is what we've seen. Those sales would have been down, that would have been more profitable. But again, that's also a function of likewise for Hong Kong and emergence from the pandemic. You're going to start to see a more positive impact.

Doug Young, Analyst

Yes. Okay. That's fine. And then just one for Dan on DentaQuest. I think you show reported earnings, I think, for Dental of $9 million. I'm more curious as to what the underlying earnings contribution from DentaQuest was if you can quantify that? And can you provide a bit of an update on how the integration is going? Because from the outside looking in, it looks like it's going well. Just wanted to get a little more detail.

Daniel Fishbein, President, Group Benefits

Sure, Doug. If you look at the integration expense line that we show, the $18 million there is essentially all DentaQuest. So you can make that inference and just add the $18 million and the $9 million back together, and you get $27 million. The $24 million of that comes from DentaQuest in the quarter. This is our first full quarter. There are a few puts and takes. But basically, that is in line with the accretion target we set when we announced the transaction. We're very pleased, obviously, to be on the mark in the first full quarter. Overall, the integration is going well. We're on target for our expense synergies. The integration itself, in terms of putting teams together and making decisions, is on schedule and going well. I'll also add that DentaQuest has a very good pipeline, one of the strongest pipelines they've ever had. With government sales, which is a big portion of what they do, they tend to be lumpy. Sometimes you get a quarter where there's a couple of big sales, and sometimes you don't. But the pipeline is very strong.

Operator, Operator

Your next question comes from Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine, Analyst

Yes. I just want to follow up on the earnings on surplus and the makeup of that portfolio. Can you maybe provide some duration characteristics of the portfolio, what percent is in cash and floating rates and how that could change? It hasn't changed already over in the next little while, if you're considering locking in some higher bond yields. I expect you're not going up to the 5-year end of the curve, maybe 2 years, but educate me.

Manjit Singh, CFO

So I'll start that, Gabe. It's Manjit. I would say, it isn't the floating rate aspect I spoke about earlier in terms of what's driving the investment income related to the interest rate increases. That doesn't move around a lot from quarter to quarter. Obviously, we do look at our portfolio on a regular basis, and we rebalance it as we see fit, but that's not really what's driving the earnings on surplus this quarter.

Randolph Brown, Chief Investment Officer

Yes. This is — Gabriel, it's Randy Brown. So I would add to that. Surplus money comes in and out, dividends come in and out, and needs for various business needs or collateral posting, etc. So it does move around a bit, but it's a big portfolio. What I'd say is we anticipated short rates rising indeed move into floating rate assets purposefully, and we did get the benefit of that.

Gabriel Dechaine, Analyst

So there is a tactical decision made at some point. It should continue to generate similar levels of income until rates are cut? Or are you making any other decisions there? Trying to get a sense of...

Randolph Brown, Chief Investment Officer

We are seeing the...

Gabriel Dechaine, Analyst

Is it sustainable?

Randolph Brown, Chief Investment Officer

No. No big allocation decisions or changes, Gabriel.

Operator, Operator

Your next question comes from Lemar Persaud with Cormark Securities.

Lemar Persaud, Analyst

I just want to come back to DentaQuest. Now that you're a couple of months into having it under Sun Life, I'm wondering if we could revisit the topic of potential revenue synergies. I seem to recall that at announcement, the synergies estimate was just talking about expenses but not revenue. So is that correct? And I'm wondering if you could size that up for us.

Daniel Fishbein, President, Group Benefits

Yes. I can make some qualitative comments on that. DentaQuest is primarily focused on the government programs business in Dental, which is an area that we were not in before. There’s not a big overlap there. Where there can be revenue synergies is as we put the commercial businesses together and really charge up the legacy Sun Life and even Assurant commercial business with the capabilities that come from the much larger at-scale DentaQuest business. You're right that we didn't put a lot in our projections around that. That could potentially be upside for us. That will emerge over a longer period of time, but we're already seeing some benefits from that. For example, this year, our commercial Dental sales are up significantly, which is great because that's one of our highest margin, highest ROE products. We also anticipate going forward, a more competitive product and more opportunities in our partnership business. During the quarter, we made major progress with a significant new commercial partnership. It was the first time that DentaQuest and our Fullscope business collaborated to offer a broader array of products to a potential partner. So we definitely see opportunity and upside there, and we'll have more to say about that as those things emerge.

Operator, Operator

Your next question comes from Paul Holden with CIBC.

Paul Holden, Analyst

I just want to quickly go back to the discussion on SLC Asset Management and that liability associated with the future buyout. I guess what I want to better understand is what exactly is driving the increase in the future liability. I'm assuming it implies that there are certain components associated with the future buyout that are exceeding your prior expectations and assumptions. So what exactly is it that's exceeding your prior assumptions, if I'm correct?

Manjit Singh, CFO

Paul, it's Manjit. The liability is out in the future. To try to think about, it's largely driven by EBITDA. We run some scenarios as to what that number would look like in 2025 and 2026. As we get closer to the timeline, we can narrow those scenarios, resulting in a higher liability.

Kevin Strain, President and CEO

Paul, it's Kevin Strain. Fundamentally, it’s a good thing when we see this liability going up because it means we're generating value in the investments we've made in SLC, and that generation of value will be reflected as Mario asked earlier in the purchase price. It's really a reflection of our estimate of value creation inside of the SLC businesses.

Paul Holden, Analyst

Totally get that. I guess I'm just trying to understand what is transpiring that's exceeding your initial expectations. Manjit gave some details around EBITDA. To drill down, is it asset growth and flows that have exceeded expectations? Is it margins exceeding expectations? Are there other factors? That's kind of what I'm trying to understand.

Kevin Strain, President and CEO

It's Kevin. I was CFO at the time, and we were looking at a 5-year time period. There was considerable uncertainty regarding equity markets and real estate markets and interest markets at that point. So when you set up your initial estimate, you factor in all those things. Over time, we gain more certainty about what that's going to be in '25 and '26.

Stephen Peacher, President, SLC Asset Management

This is Steve Peacher. If you look at the underlying drivers of the business, it's all about raising investment performance strong; do you have the right products, and that will manifest itself in higher AUM. So if you look at our AUM measures, both AUM and fee-earning AUM are growing at good rates. When we think about that going forward, we continue to feel good about that. That drives management fee revenue. As that grows, there should be positive operating margins in the business.

Paul Holden, Analyst

Okay. That's helpful. Then one quick follow-up. This is for Dan. You mentioned inflation tailwinds behind pricing and I think stop-loss and Group Benefits. Just wondering if you can give any more color or flavor around your view on the upcoming renewal cycle. I imagine based on your commentary that it looks strong, but any further thoughts would be appreciated.

Daniel Fishbein, President, Group Benefits

Yes. Sure. We're in the biggest sales and renewal time of the year. In the stop-loss business, for example, 70% of the business is sold and renews during the fourth quarter for January 1 date. We're also in the same season for the Group and Dental businesses as well. The market is quite competitive, and we have competitors who may be overly aggressive; we always tilt towards margins versus sales volumes. That will play out over the next several weeks. In the stop-loss business, there's some pressure there right now. Simultaneously, inflationary pressures and the impact of COVID mortality cause all participants to need to raise their prices appropriately. We have a couple of counterbalancing forces there. There are definitely some inflationary and experience-related price increases and a significantly competitive environment.

Operator, Operator

Your next question comes from Darko Mihelic with RBC Capital Markets.

Darko Mihelic, Analyst

I apologize if this has been asked. I had some difficulties with the phone. So the first question is with respect to Asia. It does look like sales are on fire in Vietnam, which is great. But at the same time, we had policyholder updates there, some adverse lapse. Can you maybe just talk to the lapse issue and what it was that caused that? And how should I think about the strength of Vietnam going forward?

Ingrid Johnson, President, Sun Life Asia

Thank you very much for your questions. We're excited about Vietnam and the opportunity. We're seeing a twofold increase in both the bank assurance relationships with TP Bank and ACV, as well as agency as we attract the quality agents. That's positive momentum we should expect, but it's clearly off a low base, so the percentages will meet over time. In bancassurance, these are early relationships, and we observed some initial sales relative to bank products that we needed to change due to some negative experiences; we've corrected this quarter. Moving forward, we should expect more positive outcomes as we've shifted to understand more relevant client segments for the products we sell and reduce the mix of insurance sales relative to short-term bank loans.

Darko Mihelic, Analyst

Okay. Great. That's helpful. So the product has been changed. My next question is for Manjit, maybe Kevin Morrissey. You guys provided a very helpful update in May on IFRS 17. The one thing that — I haven't seen anything in any work this quarter, so I wanted to confirm that nothing's really changed since then. You've probably got a better understanding of how things look under IFRS 17. So just wanted to confirm that when we think about forward numbers for 2023 under IFRS 17, we should still expect positive underlying net income growth off of 2022. Is that a good assumption for me to make? And are there any learnings so far that would change any of your thoughts or ideas that you had since May?

Manjit Singh, CFO

Overall, there is no new information that we're providing this quarter. The information we provided at May 31 is still appropriate. As you said, we're still working through all the impacts, and we're continuing to do our dual runs this quarter. The underlying earnings, just like under IFRS 4, take into account several factors, including the market environment. That will also be a factor in terms of what the year-over-year underlying growth will be. I don't know if Kevin, you want to add anything?

Kevin Morrissey, CFO

Not a lot to add, Darko. We've been going through our dual reporting. It's quite good news in that it's confirming the information and deepening our understanding of the business. We're not seeing any changes, so it's good news that it's not changing any fundamental messages from the update we gave in May.

Darko Mihelic, Analyst

Okay. Great. Thank you very much for that confirmation.

Operator, Operator

Your next question comes from Nigel D'Souza with Veritas Investment Research.

Nigel D'Souza, Analyst

I wanted to follow up on the debt side. You had two sizable redemptions last quarter and this quarter. Those are of lower coupon yielding debt. I'm trying to get a sense of how that impacted the interest on debt component of earnings on surplus going forward. That component is higher quarter-over-quarter, year-over-year. Should we expect that to trend upwards in a higher rate environment, and I guess, place pressure on earnings on surplus going forward?

Manjit Singh, CFO

Nigel, it's Manjit. The increase in debt cost was also related to the fact that we closed DentaQuest last quarter. That debt we issued for DentaQuest is showing up there, and we also did an early issuance of the subordinated debt that is maturing in November. Those were the two components that contributed to higher debt costs and earnings on surplus you're seeing.

Nigel D'Souza, Analyst

Any comments on that component going forward? Should that continue to trend higher? Or has it stabilized at this point?

Manjit Singh, CFO

As I mentioned in my prepared remarks, we're going to redeem the maturing debt in November, which will be outstanding for some of the period. Some of that debt is floating rates, so as interest rates go up, you’ll see some changes in that number as well.

Nigel D'Souza, Analyst

Okay. Great. And my second and last question was on the ACMA side. I noticed that you had a favorable impact related to mortality, particularly in the U.K. and Group Retirement. Just trying to get a sense of if there could be an unfavorable impact on mortality driven by COVID down the line. So far, we're seeing favorable impacts drop in experience. Any sense of when that might affect the actual liability side?

Kevin Morrissey, CFO

Thanks for the question, Nigel. This is Kevin Morrissey. You're right, we saw some favorable impacts from ACMA in mortality, both in Canada and in the U.K., but it was not related to COVID. I want to emphasize the fact that we got some favorable experience going through COVID, but the assumptions update did not include that. There was no significant impact from that. In the longer term on other businesses, we're still observing and we'll see what the future holds, but we have a neutral expectation as we've seen on the life insurance business. For some longer-term businesses, it's been benign. For some businesses where it's been more severe, it's in a shorter pricing valuation cycle like the group business.

Operator, Operator

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

Yaniv Bitton, VP, Head of Investor Relations and Capital Markets

Today's call will be available for replay in the Investor Relations section of our website. Thank you, and have a good day.