Earnings Call Transcript - SLF Q1 2022

Operator, Operator

Good morning, everyone. My name is Latif, and I will be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q1 2022 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a Question and Answer session. The host of this call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton.

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

Thank you. And good morning, everyone. Welcome to Sun Life's Earnings Call for the First 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 an overview of our first quarter strategic highlights from Kevin D. Strain, President and Chief Executive Officer. Following Kevin's remarks, 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 will also be 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 D. Strain, President and Chief Executive Officer

Thanks, Yaniv. Good morning to everybody on the call today. Turning to slide four, Sun Life delivered a solid start to 2022, driven by our diversified business model, prudent risk management practices, and strong capital position. Reported net income of $858 million was down 8% from the prior year. An underlying net income of $843 million was broadly in line with last year. COVID-19 continued to impact our businesses and while headwinds from COVID-19 remain, as of March, we have started to see an improvement in U.S. COVID-related deaths, which should drive more favorable mortality experience in the second quarter. We continue to monitor trends closely, and in most of our markets, we are seeing a transition as COVID becomes less of an impact, and populations have increased immunity. This doesn't mean COVID is over, but it does suggest smaller impacts in terms of claims and business interruptions going forward. We're also pleased that in both of our markets, our offices are now open, and we have people working flexibly, both in the office and virtually as their day allows. With the war in Ukraine impacting economic conditions, supply chains, and energy costs, the world is facing new challenges with heightened geopolitical pressures and central banks raising rates to curb higher-than-expected inflation. These challenges create uncertainty. But our diversified business mix and strong risk management will enable us to manage through these headwinds. We're expecting pressure on equity markets, credit, and expenses due to inflation, but higher interest rates, particularly at the long end of the curve, should help drive profitability. The ongoing growth in our businesses also supports our medium-term objectives. Our capital position remains strong, with a LICAT ratio of 143% at SLS. We're also pleased to announce a 4.5% increase to our dividend, demonstrating our commitment to deliver value for our shareholders. Turning to slide five, we continued to deliver on our purpose and our ambition in the quarter as we saw continued progress in delivering on our client impact strategy. Sustainability is a key component of our strategy and in March we released our annual sustainability report, which outlines the areas where Sun Life can have the greatest impact, including increasing financial security, fostering healthier lives, and advancing sustainable investing. The report outlines how being sustainability-driven is core to Sun Life's strategy and how we're making an impact on sustainability for our clients, our employees and advisors, our communities and future generations. In Hong Kong, we announced Stellar, the first ESG savings plan in the market that actively integrates ESG concepts into its investment strategies. This enables clients to build wealth in a way that has a positive impact while also ensuring a legacy for future generations. Stellar allocates funds to sustainable investments such as renewable energy, sustainable buildings, energy transition, and water and waste management with a particular focus on assets with relatively low carbon intensity. This is a great example of bringing a sustainable solution to market by leveraging the strength of SLP management and our affiliated companies, InfraRed Capital Partners and BentallGreenOak, as well as our local investments team in Hong Kong. Moving to distribution excellence, last month, we announced the expansion of our partnership with CIMB Niaga in Indonesia. CIMB is an important regional partner for us in Asia. In fact, CIMB Niaga was one of our first-ever bancassurance partners. Under the new agreement, Sun Life will be the provider of insurance solutions to CIMB Niaga customers through all channels starting in 2025. We are excited about expanding our relationship with CIMB in Indonesia. Indonesia is the largest economy in Southeast Asia with a young emerging middle class, one of the world's largest working-age populations, and low insurance penetration. Turning to asset management, we continue to see strong momentum at SLP management where in the first quarter, we raised $5.7 billion of capital, reflecting the strength and diversification of our alternative investment capabilities. Sun Life was also recognized for its inclusive culture last month when it was named one of the 2022 best workplaces in Canada by Great Place to Work. I'm proud of this achievement and I want to thank our employees for making this possible. We're also excited that starting next season, Sun Life will be the official health and wellness partner of the Toronto Raptors basketball team. As part of this extended partnership, our goal together is to find new opportunities to help Canadians live healthier lives. Slide 5 and 6 also provide an update on how we continue to drive digital leadership across the organization. In Canada, we launched Prospr by Sun Life, delivering a simple and intuitive client experience. Prospr by Sun Life is a first-of-its-kind hybrid advice solution that provides all Canadians with a digital tool to identify, track, and reach their protection, wealth, and health goals all in one place. Prospr is linked to a team of salaried advisors who can provide recommendations and product solutions to our clients at moments that matter. In the U.S., we introduced Benefits Explorer. We know benefit selection can be stressful and confusing for some members. So this tool helps educate and prepare employees for benefits enrollment. The tool provides access to life benefits counselors, direct links to their employer's online enrollment, and offers employees a guided path to learn about their benefits through the year so they can choose the right benefits package for their needs. And in Asia, our predictive modeling tool, Next Best Offer helps our advisors recommend the right products at the right moment to our clients. We've seen terrific results with over 70% product take-up from the clients we were able to engage through this tool. These are just a few examples of how Sun Life's digital leadership is delivering on our client impact strategy while also generating business growth. I also want to provide a quick update on our agreement to acquire DentaQuest. We've made good progress in obtaining necessary approvals and remain on track for closing in the first half of the year. We're looking forward to DentaQuest becoming part of the Sun Life family and welcoming their employees and 33 million members to Sun Life. Before I hand the call over to Manjit, I want to state our hearts and thoughts remain with the people of Ukraine and everyone affected by the senseless invasion and war. Together with the global community, we're concerned about the ongoing humanitarian crisis in the country and surrounding regions, and the threats to global peace and security. Sun Life, its companies and affiliates including BentallGreenOak and InfraRed Capital Partners, along with our employees, have donated more than $1.1 million to various charities that are providing direct humanitarian support in Ukraine. We also know that people are struggling with mental health concerns, which have been exacerbated by both the ongoing pandemic as well as concerns related to world security and peace. As a result, in partnership with Dialogue, we are currently providing free access to self-guided online therapy to anyone in Canada struggling with mental health issues. All of this continues to drive home how important our purpose is. And I can't remember a time when helping people achieve lifetime financial security and live a healthier life has been more important. In our mix of Asset Management and insurance, businesses are well-positioned to deliver on this purpose, but also to manage through these economic headwinds. With that, Manjit will now take us through the financial results for the first quarter.

Manjit Singh, Executive Vice President and Chief Financial Officer

Thank you, Kevin. And good morning, everyone. Slide 8 provides an overview of our first-quarter results. Sun Life delivered solid results amidst the challenging operating environment with good momentum across all of our business groups. Reported net income in the quarter was $858 million, down 8%, reflecting less favorable market-related impacts. Underlying net income of $843 million, an underlying earnings per share of $1.44 were down modestly from the prior year. Earnings for the quarter were supported by strong fundamental business activity, partially offset by COVID-related impacts in the U.S. and Asia. Earnings from surplus of $65 million was lower this quarter, primarily driven by higher external debt costs and lower AFS gains. With rising rates and wider spreads, contributions from AFS gains are expected to moderate. At the same time, these factors can also provide trading opportunities which can generate investment-related gains. Underlying return on equity was 14% in the quarter. Assets under management were $1.35 trillion at the end of Q1, which was down from the end of last quarter, reflecting declines in equity markets and rising interest rates. Book value per share was up 11%, and our capital position remains strong with LICAT ratios of 143% at SLS and 123% at SLA, and a financial leverage ratio of 25.9%. Let's turn to our business group performance starting online on slide ten with MFS. MFS reported net income of $228 million, which was up 23% from the prior year, reflecting lower fair value changes on share-based payment awards. Underlying net income was up 4% driven by higher average net assets. MFS generated a solid pre-tax net operating margin of 39%. Compared to the fourth quarter of 2021, the operating margin declined by four percentage points due to lower average net assets and seasonally higher compensation expenses. AUM declined 8% during the quarter to $637 billion, largely reflecting the decline in equity markets and $5.4 billion of fund outflows. MFS continues to deliver strong long-term fund performance for our clients. In the annual bearings rankings released in February, MFS ranked in the Top 10 for the five and ten-year periods across its U.S. fund lineup. Turning to Slide 11. SLC management delivered another strong quarter with reported net income of $19 million and underlying net income of $34 million. We have provided some additional financial metrics to SLC management that align with alternative asset management peers. One of the key metrics is fee-related earnings, which represents the profitability for managing the assets before items such as real-life performance fees. Fee-related earnings were up 38% year-over-year, reflecting strong capital raising activity and deployment into fee-earning AUM over the past 12 months. The fee-related earnings margin of 23% was down modestly due to higher marketing costs for capital raising activities. We raised a total of $5.7 billion this quarter, reflecting the strength and diversification of our investments platform. We're currently holding $18 billion of AUM that is not yet earning fees. Once invested, these assets can generate annualized fee revenue of more than $150 million. On slide 12, Canada reported net income of $263 million, down 35% year-over-year, mainly due to market-related impacts. Underlying net income of $298 million was up 5% from the prior year, underpinned by broad-based business growth and higher investment gains. Momentum in the Canadian business is strong. Expected profit growth was 7%. Total wealth sales were solid, reflecting higher defined contribution sales. Insurance sales were strong, driven by new group benefits mandates and higher non-par life sales. We're also continuing to invest in capabilities and make it easier for clients to do business with us. One example is our investment in predictive analytics in our underwriting process. This has allowed us to process over 60% of life policies without lab testing, further improving our overall client experience. Turning to slide 13, the U.S. reported net income of $133 million was down 20% from the prior year, reflecting a decline in the underlying net income. Underlying net income for the first quarter of $93 million includes $30 million of COVID-related impacts, mostly driven by elevated group mortality. Compared to the prior quarter, earnings were up $37 million driven by favorable stop-loss morbidity and a 17% decline in working-age population deaths partially offset by higher long-term disability claims. Looking forward, we expect pandemic-related mortality headwinds to moderate as U.S. deaths have continued to decline since early March. Similarly, we expect that there will be some normalization of favorable stop-loss morbidity experience as healthcare utilization starts to increase. More importantly, the core fundamentals of our U.S. business remain strong as we continue to generate high persistency, good premium growth, and achieved solid pricing margins, all while making investments in our product and digital capabilities. Slide 14 outlines Asia's results for the quarter. Reported net income was $161 million, down 16% from the prior year in constant currency, reflecting market-related impacts. Underlying net income of $152 million was down 1% on a constant currency basis. The first-quarter results included lower sales in Hong Kong, driven by heightened corporate-related lockdown measures. Mortality experience was elevated internationally, driven by a small number of larger claims. These factors were partially offset by higher investment activity gains and disciplined expense management. Excluding Hong Kong, insurance sales were relatively consistent with the prior year, which highlights the benefits of our diversified markets and products across Asia. Wealth net flows at nearly $300 million reflected strength in the Hong Kong NPS market, where we continue to rank second overall for net flows. Looking forward, as COVID restrictions are slowly lifted in our Asia markets, we are optimistic that sales activity will pick up. Altogether, our businesses delivered solid financial results against a challenging macroeconomic backdrop. Although we expect headwinds to continue over the near term, we believe our diversified business model, along with our strong capital position, provides a resilient foundation to manage through the current environment. We will also maintain our focus on executing on key strategic priorities, and we will continue to invest in our businesses for future growth. Before I close out, I want to remind everyone about our IFRS 17 education session on May 31st. Overall, Sun Life is well-prepared for the transition to IFRS 17, and we look forward to sharing more information with you at the end of the month. With that, I'll turn the call back to Yaniv for Q&A.

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

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

Operator, Operator

Thank you. Please hold on while we prepare the Q&A list. Our first question comes from Meny Grauman of Scotia Bank. Your line is open.

Meny Grauman, Analyst

Hi, Dan. I just wanted a little bit more detail on your look for mortality in the U.S. It was noted that it's improving. When do you expect it to actually normalize? And if we look at the stop-loss business as well, when do you expect COVID-related impacts to fully normalize there as well?

Daniel R. Fishbein, Chief Medical Officer

Good morning, Meny. It's Dan Fishbein. Thank you for your questions. Regarding mortality, we are seeing significant improvement, particularly in March, which was better sequentially compared to the fourth quarter. Breaking it down by the months, we are beginning to see steady improvement each month. I can tell you that April showed further improvement, and so far in May, that trend continues. External estimates indicated about 160,000 total deaths in the U.S. during the first quarter, and predictions for the second quarter average around 30,000 total deaths, reflecting a reduction of about 80%. We anticipate seeing significant improvements in our mortality rates as a result. Unfortunately, we do not expect COVID to disappear completely, and we believe there will be elevated mortality for some time. We are incorporating this into our pricing, which we mentioned would take a full three years to cycle through our entire business. We began raising prices at the end of last year, but it will take time for the pricing to fully reflect this, likely resulting in a mid-single-digit impact. We hope to maintain the current relatively low level, though there may be some fluctuations in the future. Currently, we are seeing 325 deaths per day on a seven-day average in the U.S., compared to numbers in the first quarter that peaked at around 2,700 per day, indicating a significantly lower mortality level now. Regarding stop-loss, we had favorable results in the first quarter, with about half of that attributable to COVID-related delays in care and the other half linked to solid underlying underwriting results. We believe that hospital utilization will return to near-normal levels over the next few quarters, but that will take some time. Our positive underlying results are expected to continue.

Meny Grauman, Analyst

Thanks for that. And then just maybe just a follow-up on the pricing. We talked about it last quarter, but just from a competitive point of view, what are you seeing out there in the market? Are most of your competitors viewing it the same way as you in terms of the necessity to raise pricing? COVID is not going away, or is there basically what's going on in the market now relative to the pricing that you're pushing through?

Daniel R. Fishbein, Chief Medical Officer

Generally, our sense is that the mid-single-digit range is what the industry is doing. There's always exceptions. It remains a highly competitive market and so on a case-by-case basis, we still see pretty intense competition. But we believe that our level of increase is consistent with the market.

Meny Grauman, Analyst

Thank you.

David Motemaden, Analyst

Thanks. Good morning. Just had a question for MFS. Kevin, could you just talk about the margin outlook there? And how you think you can manage through the market volatility given some of the inflationary comments you made in your prepared remarks that may make it more difficult to manage the expense base than in the past?

Kevin D. Strain, President and Chief Executive Officer

Well thanks, David. I'm going to let Mike answer the question on that.

Michael Roberge, Chief Investment Officer

Good morning, David. I mean, clearly, as we made our way through Q1, year-over-year results were up pre-tax was up over last year. But as A&A continued to come down in the second quarter relative to last year, that's going to obviously have an impact on profitability and the margin. The guidance we provide over time is that in a normal environment we think a net margin in the 35 to 40 range; we were at the higher end of that and well over that late last year, given the market at all-time highs. What you'll see in the expense side will naturally come down as those variable items that are tied to profitability like compensation and asset-based fees that we've paid distributors. So we're still comfortable with that range. But you should expect that if the market stays where it is for the year, obviously the margins are going to be pressured relative to last year.

David Motemaden, Analyst

Yes, got it. That makes sense. And then another question just for Dan, just in terms of the non-COVID long-term disability experience, could you just talk about what you're seeing? What you saw in the quarter, your expectations, and if you're re-pricing the business or how you're repricing the business in response to that?

Daniel R. Fishbein, Chief Medical Officer

Yeah. We definitely are seeing some elevated morbidity in long-term disability now; a significant amount of that is COVID-related. There are some long COVID cases. The good news is although this is a little more anecdotal, we are seeing recoveries in long COVID, so those disabilities don't seem to be long-term persistent. But there is some overall elevation in LTD experience that's non-COVID-related, as well as it's modest, but it's real. We think that's related to some of the second-order effects of the pandemic, including the recent moves by some employers to require employees to return to the office. We think some of that will persist, but maybe not long term; that may have a few quarters of impact as the labor market and employers find their equilibrium of how they want to work in the future. However, like in our group life business, we are raising prices in our disability business as well to reflect these impacts. Coincidentally, it's the same mid-single-digits kind of range. We're generally seeing that in the marketplace as well. Same effect though you see case-by-case intense competition. But we do believe competitors are raising rates by a similar amount.

David Motemaden, Analyst

Got it. Thanks for that color.

Operator, Operator

Thank you. Our next question comes from Gabriel Dechaine of National Bank. Your line is open.

Gabriel Dechaine, Analyst

Good morning. Just yield enhancement gains. Big uptick this quarter from what we've seen in the prior few quarters. Over a $100 million, can you tell me what that number would look like under IFRS 17?

Manjit Singh, Executive Vice President and Chief Financial Officer

Gabriel, it's Manjit. Good morning. As you know, the overall investment activity gains are largely driven by a couple of things: the overall market conditions and our available funds that we have to put into the market to invest. Obviously, we had some pretty good conditions in the quarter, and our investment teams took advantage of that to invest in good quality, higher-yielding assets, and that's what drove the gain in the quarter. On the IFRS 17 question, we'll handle that in our May 31st session, so we'll give you more details then.

Gabriel Dechaine, Analyst

Would it be materially lower?

Manjit Singh, Executive Vice President and Chief Financial Officer

I will provide more details on May 31st.

Gabriel Dechaine, Analyst

And I guess this quarter, I mean, in the current accounting, this quarter probably seeing similar spread pick-up opportunities, right?

Manjit Singh, Executive Vice President and Chief Financial Officer

Yeah. It'll depend on the market availability as well as the funds that we are putting into the market. So far, the market is continuing to provide some opportunities.

Operator, Operator

Thank you. Our next question comes from Scott Chan of Canaccord. Your line is open.

Scott Chan, Analyst

Good morning. I would like to hear from Manjit or Steve regarding SLC. We appreciate the updated disclosure in your statement, specifically about the net income target for FRE that you revised last quarter. As for the margins, we are not ready to set an FRE target, but margins were in the low twenties, and you mentioned the operating target of 30-35 percent by 2025. Can we assume that the sales lead offering margin will align with that operating target, or should we expect some variations?

Stephen C. Peacher, Chief Operating Officer

Thanks everyone. This is Steve. I can address that. Over time, the primary distinction between FRE related earnings and operating income will involve performance fees and income from seed investments, which account for the differences we see in income and FRE margin. As the business expands, we expect to see an increase in performance fees and seed capital investments, leading to more seed-related income. Regarding our margin for the quarter, we are on track to meet the margin targets we established for 2025. Some fluctuations in margin from quarter to quarter, or even year over year, can be attributed to factors like catch-up fees, which may affect the margin, or marketing expenses. If we have significant fundraising efforts, we may incur marketing costs in one quarter without having yet earned the corresponding revenue, as that will unfold over time as funds are invested. Therefore, you can expect some fluctuation in that regard, but we believe we are on course to meet our targets.

Scott Chan, Analyst

And where have you seen work well, seeing what's happening in the public markets, but the private markets are your all platform. Can you maybe describe any market headwinds that you're seeing or perhaps tailwinds in the current environment?

Stephen C. Peacher, Chief Operating Officer

You know I think it’s a bit too early to see what the long-term impact is on either the underlying portfolios and our different asset classes or on the fundraising. I would say the first quarter fundraising, we feel really good about we haven't really seen examples of investors pulling back from these asset classes yet. If market volatility really picks up, you could see that; we haven't seen it yet. I think the market environment can actually cut both ways. With rates going up and spreads going up, that could have an impact on asset classes like real estate. Though I would say real estate portfolios were up strongly during the first quarter. But on the flip side, with rising rates, we’ve actually seen money coming back into our fixed income portfolios as pension funds help to fund their rate funding ratio. In some cases, they are now more willing to put more money back into fixed income at higher yields. So it's a little too early to see the longer-term impacts, but I think it cuts a couple of different ways.

Scott Chan, Analyst

Thank you very much.

Operator, Operator

Thank you. Our next question comes from Paul Holden of CIBC. Your question, please.

Paul Holden, Analyst

Thank you. Good morning. So going back to the U.S. group and the conversation around the normalization of experience. And perhaps mortality staying higher for longer. Is there anything in your mind that's changed your profit margin expectation, excluding the DentaQuest acquisition?

Daniel R. Fishbein, Chief Medical Officer

Good morning, Paul. It's Dan Fishbein again. There really isn't. Obviously, the fact that we may see somewhat elevated mortality, although certainly nowhere near what we've been seeing in over the past couple of years, in the short term could affect margins. But as we reprice for that, and we should be able to reprice for that, that would put us back at the same margins. As I mentioned in the last call, overall, our group benefits business is in the best condition that it's ever been. Sales are strong, persistence has improved, and we are getting the pricing that we ask for that we need. We've had significant gains in expense efficiencies, introduced new products, capabilities, and digital programs into the marketplace. All of those things position us very well in the previous margin guidance that we've given. Those 7% or greater is still very much our expectations absent COVID effects. But the fundamentals of the business remain strong and remain as they were.

Paul Holden, Analyst

Thank you. I have a question about capital allocation. You mentioned some strengths of the business, and with valuations declining, are you seeing more opportunities for capital deployment? Would you consider being opportunistic in this environment regarding capital deployment?

Daniel R. Fishbein, Chief Medical Officer

Well, thanks, Paul. As you know, we've talked about in other quarters our priorities for capital deployment remain largely the same. We're focused on supporting our organic growth, and our organic growth target for EPS is 8% to 10% and continue on that. We're committed to supporting our dividend and the dividend growth, and we've outlined that for the 50% of underlying earnings, and you saw the 4.5% increase in our dividend this quarter. Of course, we've been able to deploy into M&A that improves either scale or adds new capabilities, like DentaQuest, that's going to be closing soon, and that's going to use a big chunk of capital. But we're always looking sort of forward at what the opportunities are across the three of those. And we continually keep buybacks as an alternative if we see that the level of capital is more than what we need, we give it back to shareholders. So at this point in time, it's a combination of economic conditions, uses we have for capital, and we continue to look at all of the uses.

Operator, Operator

Thank you. Our next question comes from Doug Young of Desjardins Capital Markets. Your line is open.

Doug Young, Analyst

Good morning. And I guess this question is for Jacques. I think group morbidity experience in Canada was adverse once again. And I know that you've been taking actions and putting through price increases. Just wanted to get a better sense of what you're seeing on the ground and what level of price increases are flowing through, and when we might see that turn.

Jacques Goulet, President of Sun Life Canada

Thank you for the question, Doug. This is Jacques. You are correct that the morbidity experience for the quarter is unfavorable, particularly regarding group benefits disability. I want to highlight two key aspects we're monitoring: the volume of cases, known as incidence, and the duration of those cases before individuals return to work. In May 2019, we made a significant price increase based on our models indicating a lasting upward trend in incidence. Currently, I can confirm that incidence aligns with our pricing and expectations. The challenge lies with the duration, which we do not currently view as a lasting trend. Factors like COVID and access to care, including surgeries, have contributed to this situation. We believe it is temporary, but if we notice changes suggesting a more persistent issue, we will take action. However, at this point, we do not believe that is the case.

Doug Young, Analyst

Okay. And then just a question on the Asia business, there is a large Indian state for an insurance company in India going public which is interesting to talk about. I'm just curious what, if any, of this has an impact on your viewpoints in India or your India life insurance business?

Kevin D. Strain, President and Chief Executive Officer

I can begin, and then Ingrid, who is also on the call, can provide additional insights. The LIC is the largest insurance provider in the country, formed by the merger of all insurance companies in 1956 and 1957. Being a public company offers a level of discipline and transparency that is likely beneficial for the industry in the long run. We value our partnership and have a strong presence in both the insurance and asset management sectors. This status remains unchanged with LIC going public, as they were already a significant competitor. We remain optimistic about India and believe there is significant potential there. I wonder if Ingrid would like to add anything?

Ingrid Johnson, Executive Vice President, Asia

Other than you would have seen you still had relatively strong sales in the quarter and we're excited about the business north of the digitalization that's taking place. We are well-positioned in both life and asset management.

Manjit Singh, Executive Vice President and Chief Financial Officer

You'd see that the evaluations in India are quite high and I would note that the P multiples are high. That shows you, I think the long-term value creation opportunity in India.

Operator, Operator

Great. Thanks.

Mario Mendonca, Analyst

Good morning. I'd like to discuss policyholder expenses and the policyholder experience. I noticed that the expense experience was positive this quarter. Looking back at the model, I believe the last time that happened was in Q3 2019. Can you explain why it changed this quarter? Additionally, the other experience was quite negative, specifically the minus $41 million. Should we consider these two together?

Manjit Singh, Executive Vice President and Chief Financial Officer

Good morning, Mario, it's Manjit. Regarding the first item, the credit you see in expenses this quarter primarily comes from some compensation adjustments that are made during the year-end process. There was a true-up for that, which resulted in a recovery during the quarter. Additionally, we have some investments in businesses over time that are included in that line. One of those investments is related to IFRS 17. We are also making some smaller investments in the BG group, which contributes to that line as well.

Mario Mendonca, Analyst

I appreciate that you're doing your IFRS update later on this month. Given the market's interest, is there anything you can share about what the transition could mean for the company's book value today?

Manjit Singh, Executive Vice President and Chief Financial Officer

Again, I think in a minute, it's as you say, there's different components to that. I don't think it would really be helpful to give you a short answer to that. I think we want to take the time to walk you through the various elements of that and how they come together on May 31st.

Mario Mendonca, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from Tom MacKinnon of BMO Capital. Your line is open.

Tom MacKinnon, Analyst

Good morning, and thanks for taking my question. Just with respect to an expected dividend increase, it kind of just shows there's some recent good capital generation here. I don't think we've heard anything about kind of excess capital generation since you gave us an $800 million annual figure several years ago. So is there anything you can share with us with respect to excess capital generation at Sun Life? And then I have a follow-up.

Manjit Singh, Executive Vice President and Chief Financial Officer

Good morning, Tom. It's Manjit, I'll take that. As you know, we've maintained a strong capital position for many years, and that's really underpinned by our disciplined approach to capital management. An important component of that disciplined approach is generating strong capital from our diversified portfolio of businesses. As Kevin outlined, we do have a very clear and consistent approach to how we manage our capital. We first invest in organic growth for our businesses, and that consumes about 25 to 35% of our overall capital generated from underlying net income. Next, we focus on growing our dividend. As we've talked about, our payout range is 40 to 50% of underlying income, and so that leaves about 25% to 35% of underlying net income for excess capital generation to deploy before the impacts of market-related items. If you were to take a look at that for the past year, that would have been about a billion dollars before those market-related items; so a bit higher than the $800 million we saw earlier.

Tom MacKinnon, Analyst

Okay. That's great. And just with respect to some of the discussions on group morbidity, is the thinking that we should be looking at your more just confirming that might be more short-term related, is it more COVID-related? Should the focus that would be more on unemployment. There is sometimes a selection in group morbidity. So as long as we stay with relatively good employment levels, would you expect group morbidity; just the modest uptick that we saw in the quarter to come back in as a result of unemployment being fairly, fairly sorted here?

Kevin D. Strain, President and Chief Executive Officer

Tom, I think we can let Dan answer that first for the U.S., and Jacques answer second for Canada.

Daniel R. Fishbein, Chief Medical Officer

Sure. In the U.S., as you noted, unemployment is almost at a historically low level. In fact, there are 11.5 million open jobs in the U.S. right now. So we don't think unemployment is really a factor here. We think there are other second-order effects. As I mentioned, including employers requiring people to come back into the office who might not be fully comfortable doing that. That's likely a transient effect. The marketplace will find its equilibrium as labor and employers decide how they want to work together in the future. So we don't see that as necessarily a persistent impact.

Jacques Goulet, President of Sun Life Canada

And Tom, this is Jacques. Similar to Dan, I would say we don't see employment levels as being a material issue at the moment to what we're seeing. It's really about duration, as I said earlier. I didn't mention it earlier, but mental health cases tend to be a bit longer than all other cases. With the access to care, it's really an issue of how quickly we can get people back to work. At the moment I would say we don't expect that to be a durable trend, but we're obviously watching it very closely, Tom, since it has obviously an impact on our results.

Tom MacKinnon, Analyst

Can you provide any insights on the impairment this quarter and how we should approach credit moving forward?

Randolph Brown, Chief Credit Officer

Tom, this is Randy Brown. I will take that. The impairments we saw are a couple of credits within our private fixed income portfolio. They were entirely idiosyncratic in nature and so not indicative of any trends either within PF5 or our overall portfolio. I think overall, you will see another positive credit release this quarter, albeit down from prior quarters. I'm very comfortable with the composition of the portfolio. We have to see how markets play out as we look forward.

Operator, Operator

Thank you. Our next question comes from Lemar Persaud of Cormark. Your line is open.

Lemar Persaud, Analyst

Thanks. My question is probably most senior for Manjit, and it's around, I guess, the outlook for earnings and surplus in the rough $100 million range. The rough target may bounce around from quarter to quarter. But looking at that company-target in the context of what we've seen over the past few quarters, some of the challenges associated with generating AFS gains and seed investments in gains on what's putting out of the markets and rate environment. Does this feel like $100 million target is achievable in this market backdrop? The reason I ask is you have to really go back like over a decade to find a few quarters during up earnings on surplus, depending comments would be helpful.

Manjit Singh, Executive Vice President and Chief Financial Officer

Sure. Good morning, Lemar. It's Manjit. As we mentioned, our earnings and surplus have kind of been in the $100 million range. And this quarter, we saw $65 million. A couple of items that led to lower results: we had lower mark-to-market seed investment losses. That really reflects the wider credit spreads you're seeing. There were some timing items in our investment income. We also had some higher debt costs reflecting the higher float rates on floating-rate debt, as well as the debts that we issued to fund DentaQuest, and as you mentioned, lower AFS gains. All together, that's what drove that number. Given the current environment that we're in, and as I mentioned in my prepared remarks, you'd expect the AFS gains to be more muted, which could result in surplus number below the $100 million range that we've been seeing previously. But the other thing I mentioned obviously is also there are other components that also have different impacts on those market-related items. We've talked about it earlier in the call, that could also provide some opportunities on the investment activity against side.

Lemar Persaud, Analyst

Okay, thanks. And then if I could squeeze another one in, maybe just circling back early, there in earlier question around capital allocation for Kevin. Does management have the capacity to integrate DentaQuest while still digesting another acquisition, or will M&A be off the table for a period of time?

Kevin D. Strain, President and Chief Executive Officer

It's a great question. Thanks. If we look at DentaQuest, it is the second-largest acquisition we've ever made, but it's got a great management team. Dan and his team have executed on a large acquisition. If you remember, it's really bringing a larger dental business into a smaller dental business alongside of ours. We're pretty confident that that integration is going to go well. Manjit actually mentioned we've got the debt costs running through our earnings right now, but we don't have the benefit of the earnings coming through. That's one thing that we're looking forward to. From the overall capital position, it's obviously going to use a big chunk of the $4.7 billion we have at the Whole Co. We see that we're in stressed times right now, and if you look at the economic conditions. However, we do have a solid capital position, and we continue to assess what the opportunities are. So it is a use of the majority of the capital at the Whole Co when the deal closes. But we continue to have an eye on things that will improve the business, and we have that financial discipline that will not change. I think part of the financial discipline is looking at the economic conditions and what you’re purchasing.

Operator, Operator

Thank you. Our next question comes from Nigel D'Souza, Veritas Investment Research. Your question, please.

Nigel D’Souza, Analyst

Thank you. Good morning. I had a follow-up for you first on SLC. I believe you mentioned a $150 million analyst tenuous fee revenue that could be generated from AUM not yet invested. Wondering if you had a period over which you expect to realize that? And what margin do you expect to earn on that revenue?

Kevin D. Strain, President and Chief Executive Officer

Hi, Nigel. Thanks for the question. When we raise money across our platform, the expected investment periods can vary. But I would say we'd expect to get that money invested over 12 to 24 months generally. In some funds, the investment period can be 3 years, but generally, that can be the case. The type of funds that lead to these non-fee earning assets are generally higher fee asset classes. So it's real estate, alternative credit, infrastructure where you raise money in a fund and then drive down, and as you drive down and invest money, you start raising the fees. Those are higher fee asset classes. I'm not sure I’m prepared to give out a specific margin on that, but I would say that across our platform, those would be the higher fee assets we manage. Therefore, there are some additional costs associated with those assets, but those would generally be higher margin assets as well.

Nigel D’Souza, Analyst

Okay. So I think it's fair to assume it's probably above 20% based on what you disclosed on your fee-related earnings margin. And then the next question that I had was on your in fact, in investment activity, its favorable experience this quarter. I was wondering if you could provide some color; is that mainly yield enhancement, and how sustainable do you think this quarter's run rate is given the yield environment that we're seeing today?

Randolph Brown, Chief Credit Officer

Hi, Nigel. It's Randy Brown. I'll take that. In past quarters, we indicated that we had prepared for this period by building up some reserves, anticipating that credit spreads were very low, real rates were at historical lows, and equities were at all-time highs. Consequently, we reduced some risk and accumulated reserves. We utilized some of these reserves in the previous quarter and plan to deploy more as opportunities arise in Q2 and beyond. We are identifying opportunities due to market dislocations. Additionally, we noted the strong origination in spreads for PFI, which we expect to continue into Q2. The focus will be on how we allocate these resources on the balance sheet, but we are seeing robust spreads in that area as well.

Nigel D’Souza, Analyst

That's helping the last question that I have; you and apologies if you already answered it. On the IFRS 17 update later this month, did you mention that you'd be providing an update on the expected impact on underlying earnings or is that still further out?

Manjit Singh, Executive Vice President and Chief Financial Officer

I think we're going to cover a range of topics, including our outlook for our medium-term objectives.

Operator, Operator

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

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

I would like to thank all of our participants today. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you, and have a good day.

Operator, Operator

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