Earnings Call Transcript
SUN LIFE FINANCIAL INC (SLF)
Earnings Call Transcript - SLF Q3 2023
Operator, Operator
Good morning, and welcome to the Sun Life Financial Q3 2023 Conference Call. My name is Dalem, and I'll be your conference operator today. The host of the call is David Garg, Senior Vice President, Capital Management and Investor Relations. Please go ahead, Mr. Garg.
David Garg, Senior Vice President, Capital Management and Investor Relations
Thank you, and good morning, everyone. Welcome to Sun Life's Earnings Call for the Third Quarter of 2023. 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 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. 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 will now turn things over to Kevin.
Kevin Strain, President and Chief Executive Officer
Thanks, David, and good morning, everyone. Turning to Slide 4, we delivered good performance during the quarter, reflecting our diversified business mix, our focus on execution, and the continued importance our clients put on health and financial security. We achieved solid underlying earnings for the quarter of $930 million, maintaining steady growth year-to-date. Our positive results this quarter are attributed to good performance in our Canadian group and Wealth businesses, higher fee-related earnings and asset management, and favorable growth in Asia's Individual Protection business. Sun Life Canada achieved strong earnings this quarter, up 15% from the prior year, driven by strong investment results and improved disability experience. Sun Life Asia also had strong third quarter results driven by individual insurance sales, which were up 60% year-over-year. In Hong Kong, sales were four times higher than the prior year and over 50% higher than the previous quarter, supported by strong performance across our distribution channels. Earnings were down 19% from the prior year in our Sun Life U.S. business, largely due to lower dental results. This was driven by faster-than-expected state Medicaid redeterminations associated with the end of the public health emergency as well as continued investment in the Advantage Dental Plus business. Our total SLF assets under management now sit at $1.34 trillion, up 6% over last year. In our asset management pillar, MFS and SLC continue to perform well despite challenging market conditions. SLC management fee-related earnings increased 17%, driven by higher AUM, reflecting strong capital raising and deployment across the platform and the AAM acquisition. MFS maintained healthy margins. Net outflows were driven by industry conditions. On a year-to-date basis, defined contribution sales at MFS were up 14% compared to the prior year due to strong placement on consultant adviser and record-keeping platforms, driving approximately USD three billion in net inflows. We maintained an underlying ROE of 17.7% this quarter, approaching our medium-term financial objective of 18% plus, reflecting our disciplined capital management and sustained emphasis on capital-light businesses. Further, we maintain a strong capital position with a LICAT ratio of 147% for the quarter. We also announced a $0.03 increase to our quarterly common share dividend, and we're active on our share buyback program, demonstrating our commitment to returning capital to shareholders. Turning to Slide 5, two years ago, we introduced our client impact strategy focused on six key areas, including people and culture, financial discipline, digital leadership, distribution excellence, sustainability and a strong and trusted brand. All areas that we believe are critical to delivering on our purpose to help clients achieve life-confidence and security and live healthier lives. Over the past few months, we've refreshed our strategy to highlight our focus on trusted brand and our core values: caring, authentic, bold, inspiring and impactful, and we link sustainability to our culture. Further, we sharpened the emphasis of our strategic imperatives to highlight the importance of deeper client relationships, thinking and acting more like a digital company, leasing our talent and culture strategy, and delivering value from our past M&A, all with the goal of realizing our ambition to be one of the best asset management and insurance companies in the world. Turning to Slide 6, we continue to execute on our client impact strategy as demonstrated by several key business initiatives delivered this quarter. Improving access to care and helping clients live healthier lives remains a top priority for us, and we are continuing to expand our health-oriented businesses in multiple markets. This quarter, we were selected to move forward in the final stages of contract negotiations with the government of Canada to be the administrator of the Canadian dental care plan, which will provide access to dental care for Canadians in need. Through the plan, up to nine million additional Canadians will have access to dental care. We are excited for the opportunity to expand our role in Canada's health ecosystem and to leverage the deep knowledge from our U.S. DentaQuest business to create a positive impact in our home market. In the U.S., we established a preferred partnership with OptiMed to make specialty drugs more accessible and affordable for our stop-loss members. The new program will improve how specialty drugs are administered for members while also managing rising health care costs. We are also continuing to make it easier for clients to access care and benefits through digital channels. In October, we completed the acquisition of Dialogue, Canada's leading virtual health and wellness provider. Dialogue provides access to quality, high-touch care to 50,000 organizations, representing nearly 2.8 million clients in Canada and internationally. Dialogue will play a key role in delivering on our purpose for clients. As an example, where Dialogue is having an impact beyond Canada, last week, we launched the Sun Life Health 360 app in the U.S., a digital front door to health and wellness support and resources for stop-loss members, including direct access to health navigator powered by Pinnacle Care advisers. The app was developed by Dialogue in collaboration with the U.S. and offers our U.S. members the chance to enable access to valuable tools to manage and improve their health. In Asia, we increased our strategic investments in Bowtie, Hong Kong's first virtual insurer with a leading market share of approximately 30% in Hong Kong's direct sales channel. Together, Sun Life and Bowtie are committed to making insurance affordable and accessible in our Asia markets. Across the organization, we are doing more to think and act like a digital company. One example of this is that we are experimenting with several generative AI projects, including in our contact centers, and we were one of the first to pilot Amazon Bedrock on AWS. We are focused on opportunities to enhance our client impact through technologies like GenAI. We're expanding our distribution capabilities through strategic partnerships and investments to deepen our impact. This quarter marked the start of our 15-year exclusive Bancassurance partnership with Dah Sing Bank in Hong Kong, which had a strong start from a sales perspective. In October, SLC Management entered into a strategic partnership with Scotia Bank to distribute our alternative investment capabilities to the Canadian retail market through Scotia Global Wealth Management. Through this partnership, Canadian high-net-worth investors will gain access to our world-class alternative investment capabilities. This strategic partnership, coupled with our recent acquisition of Advisor Asset Management, or AAM, positions us well to meet the growing demand for alternative assets through high net worth investors. We continue to strengthen distribution across Sun Life, our affiliates and strategic partnerships to meet the investment needs of our clients. We also continue to support the communities in which we operate. In Canada, we expanded our partnership with Spirit North, a national charitable organization, committing $1 million in funding over three years to deliver physical health programs and address health inequalities in underserved indigenous communities. We know this partnership will not only make a positive impact on the physical health of youth, but also have a tremendous impact on their emotional and mental health too. This quarter, SLC management provided another round of funding against its $110 million commitment to support 24 First Nation communities with connections to the provincial and electricity grid to improve the quality of life of the residents and eliminate thousands of tons of annual greenhouse gas emissions. Finally, I want to discuss a new role we have recently created. Over the past few years, we've seen the success and importance of strategic partnerships on business growth and on delivering on our purpose. We are also seeing more opportunities to leverage partnerships for all of our business lines globally. To that end, we've created the new role of Vice Chair of Strategic Partnerships reporting to me to leverage the global partnerships opportunities that are in front of us. I have asked Ingrid Johnson to take on this role. Ingrid's wealth of experience in global relationships, her relationship management skills, her work in supporting several Asia strategic partnerships, combined with her many years of P&L leadership makes her an ideal leader to take on this executive role. In the interim, Chris Way, Manjit and I, along with Ingrid's support, will provide guidance and leadership to our team in Asia as I conduct a search for the new President of Asia, which I expect to announce over the next month or so. Despite a challenging external environment, our diversified mix of business continues to perform well, driven by our strategy and our people and culture. We remain focused on our purpose and executing our strategy, and this focus has served us well as we delivered positive results in the quarter. With that, I'll now turn the call over to Manjit.
Manjit Singh, Executive Vice President and Chief Financial Officer
Thank you, Kevin, and good morning, everyone. Let's begin on Slide 8, which provides an overview of our third quarter results. We are pleased with our business results this quarter. Underlying net income of $930 million and underlying earnings per share of $1.59 were in line with prior year results, excluding the impact from the sale of the U.K. business. Underlying ROE of 17.7% was strong, underpinned by our diverse and attractive businesses in Wealth and Asset Management, Group Health and Protection, and Individual Protection. Wealth and Asset Management underlying earnings comprised 44% of total Q3 underlying earnings and were up 9% from the prior year. This was driven by higher investment income, reflecting volume growth and higher yields, as well as an increase in fee-related earnings in our Asset Management businesses. Group Health and Protection businesses comprised 27% of Q3 underlying earnings and grew 1% year-over-year. Strong revenue growth across all group businesses and better disability experience in Canada was largely offset by less favorable experience in the U.S. Individual protection earnings comprised 29% of underlying earnings and declined 3% year-over-year, driven by the sale of our U.K. business and lower investment results in the U.S., largely offset by strong business growth in Asia. New business CSM of $370 million more than doubled from the prior year, reflecting strong sales results in Hong Kong, International High Net Worth, and Canada. Total CSM grew 11% year-over-year, primarily driven by organic CSM growth, reflecting strong sales results. Reported net income for the quarter was $871 million, up from $111 million in the prior year. The difference between underlying and reported earnings this quarter of $59 million largely reflects the top-up in the SLC foot liability, DentaQuest integration costs, and amortization of intangibles, partially offset by favorable market-related impacts and positive ACMA. The favorable market-related impact was primarily driven by interest rates, partially offset by unfavorable real estate experience. The favorable impact from interest rates this quarter was largely due to a less inverted yield curve. As we discussed last quarter, given our current positioning as the yield curve normalizes, we expect to see favorable industry-related market impacts in reported net income. Real estate experience reflects a relatively flat return in the current quarter versus our long-term expectations of approximately 2% per quarter. We are long-term investors in real estate and continue to view this asset class as a key component of our diversified investment portfolio. Over the last 10 years, our North American real estate portfolio has generated annualized total returns of over 9%, well above our current long-term expectations. In Q3, we also conducted our annual actuarial review of assumptions and method changes. This review resulted in relatively neutral impacts of positive $35 million to reported net income and negative $43 million pre-tax to CSM. Our balance sheet and capital position remain strong. This provides us with financial flexibility to execute on attractive business opportunities and resilience to absorb potential impacts from volatile market conditions. SLF LICAT of 147% declined one point from the prior quarter as strong organic capital generation was offset by capital deployment. Capital deployments in the quarter led to a four-point decline in LICAT, driven by net sub debt redemption of $500 million, repurchase of 2.8 million shares and the close of the Dah Sing Bank, Bancassurance agreement. Holdco cash remained strong at $1.4 billion, and our leverage ratio remains low at 22%. We continue to expect strong capital generation of 25% to 30% of underlying earnings over the medium term after payment of common share dividends and investments in organic business growth. Now, let's turn to our business group performance starting on Slide 10 with MFS. MFS underlying net income of USD 207 million was down 2% from the prior year as an increase in variable compensation was partially offset by higher ANA and increased investment income. Reported net income of USD 212 million was down 12% year-over-year, driven by the fair value change in shares owned by MFS management. AUM of $556 billion was down 6% from the prior quarter driven by declines in global equity markets and net outflows. The pre-tax net operating margin of 41% was in line with the prior year. Retail net outflows were USD 3.7 billion and institutional outflows were $5.6 billion, driven by the continued impact of higher interest rates and active management flows. MFS continues to outperform its peers with lower relative net outflows. Turning to Slide 11, SLC Management generated fee-related earnings of $68 million, up 17% year-over-year. The increase reflects good capital raising and deployment of capital to fee-earning AUM over the past year as well as the AAM acquisition. Underlying net income of $53 million was up from $25 million last year, driven by higher fee-related earnings, a lower tax rate, and the non-recurrence of one-time expenses. Reported net loss at SLC Management was $16 million, primarily driven by an increase in the liabilities to buy up the remaining ownership in SLC affiliates. We undertake a detailed review of the estimated liabilities in the third quarter of the year, and this quarter's results reflect a top-up of $42 million. Capital raising of $3.2 billion increased over the prior quarter, driven by strong demand for public SLC fixed income and for real estate debt at BGO. Total AUM of $219 billion was up 5% year-over-year. This includes $21 billion that is not yet earning fees. Once invested, these assets are expected to generate annualized fee revenue of more than $180 million. In Canada, underlying net income of $338 million was driven by strong disability experience and higher investment income. Reported net income of $365 million was up year-over-year due to favorable market-related impacts. Wealth and Asset Management underlying earnings were up 14% on increased investment income from higher volumes and yield. Group Health and Protection underlying earnings increased 33% driven by favorable disability experience reflecting higher margins and lower claims as we continue to realize the benefits of our management and pricing actions. Individual protection was modestly lower year-over-year on lower investment contribution. Both group and individual businesses posted strong sales growth. Group sales were up 4% in higher health sales, while individual sales were up 24% due to higher par life sales. Turning to Slide 13. U.S. underlying net income of USD 140 million was down 19% from last year while reported net income of USD 105 million was up 9% year-over-year. Group Health and Protection underlying earnings were down year-over-year as strong revenue growth was more than offset by less favorable experience. Dental results this quarter included the impact from Medicaid redeterminations and startup costs from the expansion of Advantage Dental Plus practices. The entry has anticipated the wind-down of the public health emergency that was established during COVID and the related impact of Medicaid redeterminations. While the pace of rollout of new practices has been faster than our assumptions, we expect the total impact on membership and revenues to remain largely in line with our expectations. For Q3, this led to lower volumes and higher loss and expense ratios. Looking forward, we expect the incremental revenues from our sales pipeline to more than offset the impact of the Medicaid redetermination process. Therefore, we expect good revenue growth in 2024. We remain very pleased with the performance of the DentaQuest acquisition. We are a leading player in the industry, have strong business momentum, are on track with our integration milestones, and are confident that we will achieve our synergy targets. The group benefits business had strong revenue growth driven by solid premium growth, higher fee income and good margins. This is offset by less favorable morbidity experience. U.S. morbidity experience in the quarter remained favorable, reflecting strong group disability and stop-loss results, partially offset by unfavorable dental experience. Individual protection results declined year-over-year, reflecting lower investment contributions this quarter. U.S. group sales of $179 million were down 36% year-over-year, reflecting lower dental Medicaid sales, which are lumpy in nature as they are linked to the timing of government contracts, partially offset by higher commercial dental sales. Slide 14 outlines Asia's results for the quarter. Underlying net income of $166 million was up 7% year-over-year on a constant currency basis. Reported net income of $211 million was well above underlying income, largely reflecting favorable interest-related market impacts and positive ACMA. New business CSM for Asia was very strong at $238 million, up 193% from the prior year. Individual Protection earnings were up 25% year-over-year on a constant currency basis reflecting business growth from strong sales over the past year, improved mortality and contributions from our joint ventures. Individual protection sales were up 57%, primarily driven by strong sales growth in Hong Kong and high net worth. Hong Kong sales also benefited from the strong start of our bancassurance agreement with Dah Sing. In closing, we are pleased with the results this quarter. We maintained strong sales momentum in individual protection. We generated very strong new business CSM, and total CSM is up 11% year-over-year. Group results in both Canada and the U.S. continue to benefit from our leading capabilities and proactive management actions, which drove favorable experience. Our Asset Management businesses continue to deliver good long-term investment performance and are well positioned for growth as markets normalize. Our capital position is strong, and we continue to generate peer-leading ROE. With that, I'll turn the call back to David for Q&A.
David Garg, Senior Vice President, Capital Management and Investor Relations
Thank you, Manjit. To help ensure that all our participants have an opportunity to ask questions this morning, please limit yourself to one or two questions and then requeue with any additional questions. I will now ask the operator to pull the participants.
Operator, Operator
Thank you, Sir. Our first question comes from the line of Tom MacKinnon from BMO Capital. Please go ahead.
Tom MacKinnon, Analyst
Thank you very much. Good morning. My first question is regarding the LICAT being better than expected. You mentioned several factors that may have negatively impacted it, such as net debt and other deployments, including buybacks. However, the LICAT was only down one point compared to the previous quarter. Can we infer that strong capital generation during the quarter contributed approximately three points of LICAT capital? If that’s the case, it seems to suggest an improvement beyond your medium-term target of 25% to 30%. I also have a follow-up.
Manjit Singh, Executive Vice President and Chief Financial Officer
Tom, it's Manjit. You're right. As I mentioned earlier, we expect to generate 25% to 30% of underlying earnings as organic capital over the medium term. This reflects the portfolio of attractive capitalized businesses we have built over time. That amount may vary from quarter to quarter depending on factors like new business levels and market conditions. For the current quarter, we generated about three LICAT points, or approximately $600 million, in organic capital, which is above our previous target. This was driven by solid underlying earnings in Group Health and Protection, Asia individual protection, strong asset management earnings, and robust new business CSM. Overall, we feel very optimistic about the capital generation this quarter.
Tom MacKinnon, Analyst
And that $600 million is before payment of the common dividend, correct then?
Manjit Singh, Executive Vice President and Chief Financial Officer
Correct, yes.
Tom MacKinnon, Analyst
Yes. Okay. As a follow-up for Kevin, I believe you mentioned the changes in management regarding Ingrid's responsibilities during your prepared remarks. Did I hear that correctly? I'm curious why there would be a management change in Asia, especially given the impressive sales and CSM growth in that region.
Kevin Strain, President and Chief Executive Officer
You heard it right. We see partnerships as increasingly vital to our global strategy, and Ingrid is well positioned for that role. Asia is thriving, and we aim to maintain that momentum. As I mentioned, Chris, Manjit, and I will be focusing on Asia in the coming weeks as we prepare to appoint Ingrid's successor. Chris, who is based in Singapore, will manage the Asian markets and also serves on our joint venture Board in China, where he will take the lead. Manjit is part of our Joint Venture Board in India and will oversee operations there temporarily. As you know, I have extensive experience in Asia, having previously been the CFO and now serving as CEO, and I will be directing our hubs business in Hong Kong, Singapore, and Bermuda, while collaborating with Ingrid. I don't believe this change will hinder our progress; rather, it will enhance the company's growth through global partnerships and in Asia as well.
Manjit Singh, Executive Vice President and Chief Financial Officer
Sorry, Tom, just on your previous question, the $600 million was net of dividends, just to confirm that.
Tom MacKinnon, Analyst
Yes. Yes, that's right. Yes, correct. Yes. So if we want to look at before payment of the dividend, it would have been higher, I assume then.
Manjit Singh, Executive Vice President and Chief Financial Officer
Correct. Exactly right.
Tom MacKinnon, Analyst
Okay. Great. Is the consideration for the role being looked at from an internal or external perspective?
Kevin Strain, President and Chief Executive Officer
Yes. For all of our senior roles, we do succession planning, and we have a list of both internal and external candidates. And as I said, I expect to have an announcement in the next month or so. There is an advantage to Asia from an internal candidate because knowing Sun Life and understanding our footprint and understanding Asia is an advantage, but we always look at both internal and external and try to attract the best candidate. You should hear from us in about a month or so.
Operator, Operator
Thank you. And I show our next question comes from the line of Gabriel Dechaine from National Bank Financial. Please go ahead.
Gabriel Dechaine, Analyst
Good morning. I wanted to revisit this dental or the redeterminations of Medicaid recipients. And you said a couple of things. One, that the roll-off is taking place at a faster pace than you expected? And two, as that's happening, it's causing higher expenses, I guess, as you're processing those or something? Maybe delve into a bit more of what's behind that. And why you think things will maybe stabilize or get better? Because I'm just looking at the sales number, you averaging over $100 million over the past four quarters and that just fell off a cliff to $4 million. I'm wondering how that's expected to rebound and what the next few quarters could look like for profitability in this business, if you can?
Daniel Fishbein, Analyst
Sure. It's Dan. Let me explain the situation regarding the redeterminations following the end of the public health emergency. To remind you, during COVID, the federal government declared a public health emergency which prevented anyone from being dis-enrolled from Medicaid during that time. This emergency ended on May 11, allowing states, which handle enrollment, to recertify or re-determine eligibility. Our estimates, along with those in the industry, initially suggested that about 12% of current Medicaid members might lose their eligibility over a 24-month period. However, our most recent estimate, which aligns with industry projections, indicates that around 13.5% of members will roll off eligibility, but at a much quicker rate—approximately over a 12 or 13-month period. We anticipate that this process will be mostly completed by June 1 of next year. The main difference has been the acceleration in the timeline. As of October, we believe that about half of the necessary redeterminations have already taken place, so we are halfway through this process. There are still about three more quarters of this activity to come.
Gabriel Dechaine, Analyst
No, no, no. I got my second question. I got to hold off on that. But I...
Daniel Fishbein, Analyst
You had asked about the outlook, particularly regarding sales and their impact on loss ratios and expense ratios. It's important to note that as membership decreases, it leads to a higher expense ratio, but not necessarily increased expenses. There are some elevated expenses this quarter tied to investments in our new Advantage Dental Plus practices. However, since membership is declining more rapidly, the expenses do not decrease at the same rate. We have also observed some slight pressure on loss ratios, which is expected; the members who are being removed during the redeterminations are typically those who utilize services less frequently than the remaining members, but this is a temporary issue. Moving forward, a couple of key points to highlight. Since the acquisition last June, the Dental business has generated approximately $600 million in new business, of which about $400 million comes from seven significant Medicare and Medicaid sales, none of which is currently recorded as premium. This premium is expected to be recognized in 2024, likely within the first three quarters. The $400 million in premium is greater than what we estimate will relate to all disenrollment occurrences. Thus, we face a timing challenge with disenrollment happening more swiftly than new business emergence. This may present some difficulties over the upcoming three quarters. However, at the conclusion of this transition, the business is expected to be larger than it was before, and there is also a substantial pipeline of opportunities beyond the transactions that have already taken place.
Gabriel Dechaine, Analyst
Okay. That's very illustrative, I guess. And I guess, the next few quarters, you'll see maybe similar to this quarter, but then gradually maybe Q2, Q3 next year starting to go in the other direction in terms of net sales and premiums?
Daniel Fishbein, Analyst
In terms of premium, yes, in the next three quarters, we will see the remaining half of the membership linked to the redetermination come off, but we will also see the $400 million in new business beginning in the first quarter of next year. Additionally, it's important to note that the third quarter is typically the worst quarter for seasonality, with the highest utilization occurring as kids receive dental care just before the school year starts. This has been a consistent trend. There were also some one-time accounting adjustments and contractual adjustments during the quarter, which we expect will not happen again. Therefore, from a revenue perspective, I agree with your point. From an earnings perspective, we anticipate that the upcoming quarters will show improvement.
Kevin Strain, President and Chief Executive Officer
Gabe, it's Kevin. I want to emphasize that our view on the DentaQuest acquisition remains unchanged. We anticipated the end of the public health emergency and recognized that some members would drop off. In fact, as Dan mentioned, sales are performing better than expected. Our thinking around our M&A strategy has not shifted; in fact, we believe it may improve, and the integration process is progressing well. While we are experiencing some fluctuations this quarter, we still anticipate DentaQuest will deliver the performance we expected.
Operator, Operator
Thank you. And I show our next question comes from the line of Meny Grauman from Scotiabank. Please go ahead.
Meny Grauman, Analyst
Hi, good morning. Kevin, I wanted to follow up on your discussion of partnerships and it sounds like the thesis there has changed a little bit for the positive and maybe sharpened. So I'm just hoping you could provide a little bit more insight in terms of that, whether my impression is correct? And then a follow-up on that.
Kevin Strain, President and Chief Executive Officer
Well, Meny, we have a lot of partners around the world that link into our joint venture partners, which are significant in India and China, our bancassurance relationships, our relationships with different banks. We also have a few opportunities that we continue to sort of push on and look at in terms of partnerships. Having a senior person who thinks globally about that, we think is going to be a benefit to our strategy. And if you think about how quickly the world is changing in different areas, having these partnerships and understanding how to leverage them, we see being important to the strategy, and Ingrid is a great fit for that, as I said in my opening remarks.
Meny Grauman, Analyst
And is this a signal in terms of capital deployment in this specific area? Should we expect to see more there? Is there a change that you're signaling in that?
Kevin Strain, President and Chief Executive Officer
I wouldn't take it as a signal of capital deployment. I would take it as a signal of us leveraging the relationships we have and the opportunities that we see in front of us.
Operator, Operator
Got it. And then if I could just ask a question on Asia just in terms of Hong Kong, specifically, very strong sales. And I'm just wondering if you can maybe disaggregate how much of that is the contribution from the new bancassurance deal? How much of that is from the MCI market specifically?
Kevin Strain, President and Chief Executive Officer
Yes. Meny, Ingrid's on the line, so I'm going to let her answer the Hong Kong question.
Ingrid Johnson, Vice Chair of Strategic Partnerships
Thanks, Kevin. Thanks, Meny. We're delighted with Hong Kong. It really was a standout quarter. So sales strongly up fourfold and interestingly, strongly outpacing the market in the first six months. The factors are really twofold. So one is externally with the border reopening with Mainland China. There's significant demand and strong momentum generally, but the fact that we've outpaced the market shows that we also had significant internal readiness that we've been focusing on over the last few years, and a number of those relate to our client value proposition that we've invested in. Firstly, as you point out around our distribution. So we've emphasized all aspects of distribution. So it's around our broker relationships that we've broadened and deepened agency teams, including focused on MCI. Last call, I mentioned our beautiful client center that we've opened in Tsim Sha Tsui. We're seeing a lot of activity through that. And then Dah Sing is our first quarter where we've activated our exclusive banker relationship, and we're seeing strong sales through that, which we haven't disclosed separately. So that's on the distribution. On products, we continue to be leaders in innovation and actually incorporating some of the ESG concepts so that we're relevant for how important it is to address the climate aspects. And then the third part and also important in a brand-conscious Asia is investing in our brand, and were excited in August that we were in the top five of brand movers in Hong Kong alongside a number of leading brands, whether it's in mobile 1010 or you've had other competitors. So that's part of the reason why we are shifting gear in Asia. And so to give you a sense, pre-pandemic, MCI was around 10% of the overall sales in Hong Kong. Today, we're standing at roughly 30%. So that's a threefold increase.
Kevin Strain, President and Chief Executive Officer
I might just reiterate that in Hong Kong, you saw a combination, as Ingrid mentioned, of our investments in agency and growth there. Our investment in Dah Sing, and it's off to a great start. It started selling on July 1. A big bulk of the sales were through the broker channel, and that's been driven by Mainland Chinese visitors, but also leverages our knowledge of the high net worth business out of Bermuda. So there's a combination of things that are happening in Hong Kong that are driving those good sales. And I think that's a good thing to see that balanced growth across agency, brokerage, and our new bancassurance relationship. So we're seeing it in all three areas in Hong Kong. The team is doing a great job there.
Operator, Operator
Thank you. And I show our next question comes from the line of Mario Mendonca from TD Securities. Please go ahead.
Mario Mendonca, Analyst
Good morning, Dan, could you help me understand the redetermination a little better? I understand how it can affect your premium growth in Dental. In fact, that's well described in your supplement in your MD&A. I'm not sure I understand how the redetermination impacts experience gains in this segment, which I think you offered that the redetermination was one of the factors that drove experience gains to be down noticeably on a year-over-year basis. So help me understand that dynamic a little better the experience line in the context of the redetermination?
Daniel Fishbein, Analyst
Sure. And hopefully, this will answer it. The loss ratio does experience some pressure from the redeterminations because the people who are being dis-enrolled tend to be lower utilizers than the people who stay on the books. What happened during COVID was a lot of people who might even have gotten other coverage through getting employment remained on the books because nobody could be dis-enrolled. So we did anticipate and we are seeing some modest loss ratio impact from the disenrollment of those lower utilizing members. And then, of course, there's also just fewer members, which puts a little pressure on the expense ratio as well.
Mario Mendonca, Analyst
Given your outlook for the upcoming quarters, I understand that many factors could change. However, focusing on the Medicaid redetermination, do you anticipate the experience will be somewhat better, perhaps with some modest losses compared to previous periods due to this situation? Additionally, do you expect the experience to improve again in 2024 once the redetermination process is complete?
Daniel Fishbein, Analyst
Yes. So a couple of key factors there. One is we built some impact on the loss ratio into the experience plan. We would only see pressure on the experience gains if that impact was bigger than what we anticipated. And so we think we've built in the right amount. But of course, we could always be a little bit off there. Another very important point is 80% of our Medicaid contracts re-price where available for renegotiation of pricing in one way or another during the next 12 months. Generally, the states have been very cooperative wanting to make sure that the loss ratios on this business stay within a target range. So if they see that the loss ratio is moving in the wrong direction, generally, they've been very amenable to some renegotiation there. But in many ways, the loss ratio is a short-term commitment in these contracts because they do tend to get reset. Right now, we don't think that's a big issue. But if it did become an issue, we would have an opportunity to address that. And so you would expect to see as this process completes and the business resets, you would also expect to see the loss ratio revert to historical norms.
Operator, Operator
Thank you. And I show our next question comes from the line of Doug Young from Desjardin. Please go ahead.
Doug Young, Analyst
Hi. Good morning. Dan, excluding the U.S. redetermination, can you provide insights on the Dental experience for the quarter? Did it meet expectations, or was it worse or better than anticipated? I'm trying to understand the underlying experience trend without considering the noise from that issue.
Daniel Fishbein, Analyst
Yes. Several factors coincided during this quarter. When comparing it to the same quarter last year or the previous quarter, many aspects were similar. About half of the variance is related to the end of the public health emergency and the redetermination, mainly affecting revenue and some loss ratio pressure. The other half involves accounting and contractual adjustments. For instance, we aligned on some accounting practices after the acquisition. Additionally, we experienced seasonal impacts, as the third quarter typically sees the highest utilization. We also made unique investments in the Advantage Dental Plus business, particularly opening new practices in Texas. Therefore, half of the variance is attributed to these factors and the other half is linked to the public health emergency.
Doug Young, Analyst
Okay. And so there wasn't anything from a loss ratio perspective. It seems like it's just more normal course outside of the redetermination.
Daniel Fishbein, Analyst
Yes, some of those issues are nonrecurring, which is positive. There was nothing fundamentally wrong with the business. In fact, we remain very optimistic about the Dental business. There is another $400 million in business sold that has yet to be recorded, and the pipeline looks strong. We are meeting or exceeding all of the integration synergy targets. The momentum and performance of the business are very strong, and we expect it to meet or exceed our acquisition expectations.
Operator, Operator
Our next question comes from ACMA, specifically Kevin Morrissey. I would like to understand the impact of lapses on reported earnings and the CSM. Could you explain what drove this? In my view, lapses typically affect the CSM, but there was also an earnings impact this quarter. I'm curious if the earnings hit occurred because lapses were impacting businesses without any CSM. I'm hoping to gain clarity on what specifically caused the negative lapse.
Kevin Morrissey, Executive Officer
Yes, thank you for your question. This is Kevin Morrissey. You're correct that for the general model method involving individual wealth and protection products, changes in lapse assumptions typically affect the Contractual Service Margin (CSM). However, we did experience some specific impacts from a block in our Asia international business where we adjusted some financial risk assumptions. This adjustment was related to lapse and was specifically due to the yield curve inversion. Normally, financial risk assumptions that affect methods also go through net income, which makes this situation a bit unique. Typically, lapse impacts would be reflected in the CSM, but in this case, it's closely tied to that updated financial risk assumption and is part of the broader set of lapse assumptions.
Doug Young, Analyst
That's clear. And then just on the lapse charge that went through the CSM, can you unpack a bit about what were the main drivers there?
Kevin Morrissey, Executive Officer
Yes, the lapse impact on the Contractual Service Margin was significantly negative. There were two main sources for this, with reductions in CSM observed in both Canada and Asia. In Canada, two product categories were affected: term products experienced lower than expected renewals, and certain universal life products had higher than expected lapses, leading to reductions in CSM. In Asia, we revised the lapse assumption for our Vietnamese business. We've indicated that low persistency was a part of our review this year. We made sure to incorporate the current levels of experience in our update, and even though we are actively working on improving persistency, it was essential to acknowledge the current first-year lapse rates, which contributed to the reduction in CSM in Asia as well.
Operator, Operator
Thank you. And I show our next question comes from the line of Paul Holden from CIBC. Your line is open.
Paul Holden, Analyst
Thank you. Good morning. First question is related to the real estate experience during the quarter. Wondering if you can give us an update on how much you've changed cap rates sort of on average across the board year-to-date? And if you're expecting potentially more movement going forward on real estate valuations?
Randolph Brown, Chief Investment Officer
Sure. Thank you for the question. Paul, it's Randy Brown. So we look at several measures when looking at changing valuations on real estate. So let me start kind of overall with the comment that the total return on the real estate portfolio was essentially flat this quarter. Valuations were down by less than 1% and largely offset by income. So the negative that you've seen, as Manjit mentioned, is the difference between the long-term expected return in the actual economic return on the quarter. But as Manjit also said, our real estate portfolio has outperformed our long-term expectations. We remain quite comfortable with the assumption. In terms of specifically on your question, we look at cap rates, but we also look at yields, cap rate being more of a spot measure and yield being more of a life of the property. And so we've seen 25 to 50 basis point increases in cap rates and 50 to 75 basis point increases in yields in the portfolio. So we have, frankly, fared better than the broader market because of the very significant repositioning that I had mentioned on prior calls. So we were well positioned for this type of market with significant overweight relative to the opportunity set in industrial and residential and much lower allocations to office and retail.
Paul Holden, Analyst
Got it. And then a question for Dan, usually this time of year, you might give us a little bit of an update or your thoughts around the upcoming pricing and negotiations for stop-offs and U.S. group benefits given it's been a pretty strong quarter for or quarter, strong year for margins, are you seeing increased competition or I guess really what is your view for 2024 pricing renegotiation?
Daniel Fishbein, Analyst
Yes. Thank you. We're in the midst of selling season for really all our products, but especially for stop loss, this is like the playoffs and the Super Bowl rolled into one. Most of the sales occurred during the fourth quarter, and we're actually quite optimistic about the outlook. We've been holding to our pricing. You've seen the loss ratio normalize back towards our pricing targets as we've signaled for quite a while that, that would happen. And we are seeing some intensified competition, which always seems to happen especially this time of year. But our team is performing quite well, and we're optimistic about sales results for the quarter, while holding to our pricing targets.
Operator, Operator
Thank you. And I show our next question comes from the line of Nigel D'Souza from Veritas Investment Research. Please go ahead.
Nigel D'Souza, Analyst
Thank you. Good morning. My first question was on the other expenses line, both in Canada and Asia. I noticed that expense line has picked up meaningfully year-to-date, and there was a step-up this quarter. Just wondering what's driving higher expenses in both those segments? Or if there's any outliers or nonrecurring items we should be aware of?
Manjit Singh, Executive Vice President and Chief Financial Officer
Nigel, it's Manjit. Overall, the corporate expenses on a quarter-over-quarter basis are relatively flat. On a year-over-year basis, we have seen an increase, and there's a couple of factors that are driving that. So the first one is just increase in sort of compensation, both relative to wage inflation, and also higher incentive comps and the two businesses that you mentioned, Canada and Asia, as we've talked about earlier, have had very strong results this quarter and for the year-to-date. And then as Kevin mentioned, as Ingrid mentioned, we're also continuing to invest in these businesses. So that's also reflected in there. But then as you've talked about, you've seen higher revenues related to those expenses.
Nigel D'Souza, Analyst
Okay, that's helpful. The second question was about your review this quarter. Could you provide some insight into how your assumptions incorporated experiences since the pandemic compared to long-term trends? Also, you mentioned a favorable morbidity update in the U.S. and an unfavorable one in Canada, but this quarter seemed to show favorable results in Canada and unfavorable ones in the U.S. Could you clarify how much of the actual experience influenced those updates and what other factors played a role?
Kevin Morrissey, Executive Officer
Regarding the pandemic experience, we have fully integrated all related experiences into our valuation assumptions and updates, tailored to each local jurisdiction. We assessed how relevant the pandemic's impact is and whether it should be included in our updates. For instance, in some Annuity segments where death rates increased due to the pandemic, we chose not to project that trend moving forward. Conversely, in Life Insurance segments where the impact was minimal, we included those observations in our experience study, making them part of our regular updates. Overall, we have incorporated these elements where suitable, maintaining a conservative stance to avoid being overly aggressive. As for morbidity, when we revise our assumptions, we consider three perspectives: the long-term average of historical performance, the current trend, and future expectations. Specifically in Canada and the U.S., we've seen positive trends in morbidity this quarter. In Canada, we made some modest adjustments that reflect a longer-term outlook based on a five-year historical average, which may not align directly with recent quarterly experiences. Nonetheless, the recent two quarters in Canada showed favorable outcomes, albeit slightly elevated this quarter compared to our usual expectations. The overall trend has been positive, and should the short-term trend continue, we anticipate favorable results ahead.
Operator, Operator
Thank you. And I show our next question comes from the line of Lemar Persaud from Cormark. Please go ahead.
Lemar Persaud, Analyst
Thanks. I just want to close the loop on this medical or Medicaid redetermination. I guess, given that it was mentioned that over 50% of the redeterminations are in now, some of the new Medicaid sales coming in 2024 and Q3 being a seasonally high quarter for claims, would it be fair to suggest that this quarter was the trough for Dental earnings?
Daniel Fishbein, Analyst
I think that's a reasonable comment. We can never know for sure, but we also view it similarly, recognizing that there were some one-time events. Additionally, we've experienced many redeterminations without new business being recorded yet, which is largely a timing issue. When considering a quarter in isolation versus a longer timeframe, our year-to-date underlying net income is up 33% and sales have increased by 44%. This may provide a clearer perspective than focusing solely on the standalone quarter, especially given some of these one-time events.
Kevin Strain, President and Chief Executive Officer
Thank you, operator. I wanted to end the call by recognizing that Diwali celebrations began on Sunday in India and around the world. I want to take a moment to say Happy Diwali to our employees, our colleagues and partners around the world who are celebrating. Diwali celebrates the triumph of light over darkness, good over evil, and the human ability to overcome whatever you are facing. At Sun Life, we celebrate that resilience. Shubh Dipavali, Happy Diwali. And with that, I'll turn the call back to David.
David Garg, Senior Vice President, Capital Management and Investor Relations
Thank you, Kevin. This concludes today's call. A replay of the call will be available on the Investor Relations section on our website. Thank you, and have a great day.