Earnings Call Transcript - SLF Q3 2024

Operator, Operator

Good morning and welcome to the Sun Life Financial Q3 2024 Conference Call. My name is Galene, and I will be your conference operator today. All the lines have been placed on mute to prevent any background noise and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Your host for today’s 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 2024. 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, Tim Deacon, 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. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Kevin.

Kevin Strain, President and Chief Executive Officer

Thanks, David, and good morning everyone. Turning to Slide 4. We had a strong quarter for profitability, for financial strength and for growth. Our EPS was $1.76, up 11%, ahead of our medium-term financial objective of 8% to 10%. Both underlying and reported earnings exceeded $1 billion, showcasing the power of our diversified business platform, the strength of our client impact strategy and our focus on execution. We maintained a strong capital position, reflecting our financial discipline and capital-light businesses. Underlying ROE for the quarter of 17.9% was in line with our medium-term financial objective, while our LICAT ratio at SLF remained strong at 152%. We announced an increase to our quarterly common share dividend, consistent with our medium-term objective for our dividend payout ratio. We also bought back $146 million of common shares as part of our share buyback program. The business continues to produce capital and cash consistent with our objectives, and both the dividend increase and the share buybacks demonstrate our strong capital generation and our commitment to return capital to our shareholders. We achieved solid growth across all business groups, driven by Canada and US group health and protection sales that were up 19%, individual protection sales up 9% and higher fee income and asset management driven by higher AUM. Our AUM reached an all-time high, surpassing $1.5 trillion, reflecting both strong equity markets and the continued strength of our asset management capabilities. At $1.5 trillion, we are Canada's largest manager based on AUM. Turning to Slide 5. Our success continues to be driven by our winning strategy, which is driven by our purpose of helping clients achieve lifetime financial security and live healthier lives. We continue to focus on positioning ourselves in high-growth spaces and delivering for our clients. As such, we have sharpened our focus on our four strategic imperatives to include leveraging our asset management capabilities and extending our wealth presence, accelerating our momentum in Asia, deepening our impact along our client health journey, and operating like a digital company. Turning to Slide 6. We share some of our key highlights and progress from this last quarter. Starting with our focus on asset and wealth management, we realized solid earnings momentum stemming from higher fee income in MFS and SLC management. MFS delivered strong investment performance during the quarter and AUM returned to its highest level since Q1 2022. While outflow challenges remain, we are confident in the long-term strategy of MFS and the actions they are taking to address these headwinds, including offering a diverse range of investment products to meet evolving client needs. This quarter, MFS achieved strong momentum in separate managed accounts, which year-to-date, were up 40% relative to the same period last year. MFS also experienced growth in fixed income on strong investment performance, which contributed to steady AUM growth. Finally, MFS will be launching five actively managed ETFs on December 5. In SLC Management, fee-related earnings were up 6% year-over-year on higher AUM, driven by strong capital raising. This was SLC's highest capital-raising quarter since Q1 2021. We also acquired the remaining 20% interest in InfraRed Capital Partners, our global infrastructure investment manager. Since our initial majority stake acquisition in 2020, InfraRed has broadened SLC management's suite of alternative investment solutions, while also creating the opportunity for InfraRed to access North American investors through our distribution networks. We are also delivering on our purpose of helping clients achieve lifetime financial security through offering innovative wealth solutions. In our Canadian Group Retirement Services business, we're helping clients with their longevity needs and have launched MyRetirement Income, an innovative first for Canadians that offers retirees a reliable source of income while maintaining flexibility and the potential for continued investment growth. This fully automated solution will help ease the transition from saving during working years to drawing income in retirement. We also achieved record wealth earnings in Asia during the quarter driven by solid fund performance in India and our Hong Kong MPF business. And we also realized strong protection results in Asia. Individual protection sales were up 19% year-over-year, driven by higher sales in Hong Kong, India and Indonesia. In Hong Kong, we observed growth across all channels, including all-time high agency sales and strong contributions from our bancassurance partnership with Dah Sing Bank. In India, we continue to execute well across our distribution channels. We also continue to see strong sales momentum in Indonesia, where we are preparing to launch the next stage of our partnership with CIMB Niaga on January 1. Shifting to Health. Both Canada and the US delivered strong group benefits earnings, driven by improved morbidity experience and strong sales during the quarter. In Dental, we saw positive momentum in both Canada and the US. In Canada, as the administrator of the Canadian dental care plan, we continue to provide access to dental care for Canadians in need. To date, we have enrolled 2.7 million Canadians onto the plan and processed 2 million claims. In the US, our plan to improve dental results is proceeding well. Pricing renegotiations and claims and expense management actions are driving improved results. Membership is growing again. And while there is more work ahead, we expect results to continue to improve towards the $100 million of earnings in 2025 that we discussed last quarter. Further, this quarter, we reached a milestone, becoming the largest dental benefits provider in the US with approximately 35 million members, and we are well positioned in this attractive high-growth market. Looking at Digital, Sun Life was recognized this quarter as a 2024 CIO award Canada winner for our Sun Life Asks Generative AI chatbot. An internal Gen AI chatbot that supports employees in delivering daily tasks more efficiently. GenAI is an important part of our digital transformation, and we are committed to innovating and adopting emerging technology. In the Philippines, we implemented a new automated underwriting platform, resulting in a 50% increase in state-through processing. This platform not only enhances the client experience through faster turnaround times, but it also delivers operating efficiencies. We are implementing this automated underwriting platform across Asia. Finally, underpinning our strong business performance is our exceptional people and culture. This quarter, Sun Life was awarded the Canada Order of Excellence, recognizing our company as a leading employer that consistently prioritizes employee well-being, fosters a positive work culture, and achieves excellence in mental health. We are one of two corporations in Canada to have received this honor. Special thanks goes to Jacques, Sun Life Canada's Executive Chair, who has helped elevate our commitment to support the well-being of our people, our clients and Canadians. I'd also like to welcome Jessica Tan, our President of Sun Life Canada. Jessica has extensive global experience in insurance and digital innovation and is widely recognized for her thought leadership and execution across digital transformation and health. She brings unique skills and capabilities to Sun Life, and we are fortunate to benefit from her global experience. With that, I'll turn the call over to Tim, who will walk us through the third quarter financial results in more detail.

Tim Deacon, Executive Vice President and Chief Financial Officer

Thank you, Kevin. Good morning, everyone. Turning to slide 8. We delivered record the third quarter with underlying net income of more than $1 billion, up 9% year-over-year. Underlying earnings per share of $1.76 was up 11% year-over-year, exceeding the high end of our medium-term financial objectives. Underlying return on equity of 17.9% was in line with our medium-term financial objective supported by strength across our diversified businesses. Wealth and asset management was 42% of Q3 underlying earnings, up 4% over the prior year on higher fee income, primarily from increased asset levels due to higher markets. Group health and protection businesses were 31% of underlying earnings, up 21% year-over-year. These results reflect strong business growth in Canada and the US, higher fee income in Canada and improved group life mortality in the US. Individual protection was 27% of underlying earnings, up 3% year-over-year, driven by strong business growth in Asia and Canada, partially offset by unfavorable mortality in Asia in the prior year. Total company underlying results included adverse credit impacts of $43 million before tax and net of provision release. The net charge was less than 0.01% of assets and was isolated to a few names across several sectors. Reported net income for the quarter was $1.348 billion, $332 million above underlying net income. The difference between underlying and reported net income was driven by an update to the estimated acquisition related liabilities in SLC Management, favorable net market related impacts and positive actuarial assumptions. Favorable market related impacts were driven by positive net interest rate and equity market impacts. Real estate experience showed improvement this quarter as total returns were slightly positive, but below our long-term expectations of 7.5% per year. We completed the annual review of our actuarial assumptions or ACMA, which resulted in a modest $36 million benefit to net income and a $95 million reduction in total CSM. Our balance sheet and capital position remained very strong, with SLF LICAT ratio of 152%, up two percentage points from the prior quarter due to strong organic capital generation, partly offset by debt redemption and share buybacks. Organic capital generation of $693 million this quarter was driven by underlying net income and new business CSM. HoldCo cash remains robust at $1.2 billion, and our leverage ratio declined sequentially and remains low at 20.4%. New business CSM of $383 million was up 4% over the prior year. Total CSM has now grown to $12.8 billion, up 12% year-over-year, representing an increasing source of future profits. Finally, book value per share increased 11% over the prior year and 6% quarter-over-quarter. This demonstrates our ability to generate strong growth while returning value to our shareholders with 2 million shares repurchased this quarter under our share buyback program. Turning to our business group performance on Slide 10. We reported underlying net income of US$ 218 million, which was up 5% year-over-year, reflecting higher average net assets. Reported net income of US$ 210 million was down 1% year-over-year, and the pre-tax net operating margin of 40.5% was in line with the prior year. AUM of US$ 645 billion was up 16% over the prior year and up 4% over the prior quarter driven by market growth, partially offset by net outflows. This quarter, outflows of US$ 14 billion included several large institutional mandate redemptions and retail outflows. Institutional outflows were largely due to portfolio rebalancing, with retail outflows reflecting continued preference in the current environment for high-growth tech stocks and shorter-term interest-bearing products. Overall, MFS' long-term investment performance remains strong, with 97% of fund assets ranked in the top half of their respective Morningstar categories for 10-year performance. Fixed income performance was also strong with 98% of fund assets ranked in the top half of Morningstar categories for 10-year performance. Turning to Slide 11. SLC Management generated underlying net income of $47 million, down 11% year-over-year as higher fee-related earnings were more than offset by a favorable tax adjustment in the prior year, which did not repeat. Fee-related earnings of $72 million were up 6% year-over-year on continued growth in fee-earning AUM driven by capital raising and deployments. Reported net income of $357 million includes the impact of a decrease in the estimated acquisition-related liabilities from recent projections related to the future purchases of the remaining equity ownership in our SLC affiliates. Since acquisition, the net cumulative future liability has grown by over $300 million, reflecting continued earnings growth from our affiliate businesses. Capital raising of $7.1 billion was up $3.9 billion from the prior year, reflecting solid activity at SLC Fixed Income and BGO. Deployments of $4.6 billion were in line with the prior year as we saw continued opportunities in SLC Fixed Income and Crescent, partly offset by slower deployment in BGO. SLC's total AUM of CAD 230 billion was up $11 billion year-over-year. Turning to Slide 12. Canada delivered solid results with underlying net income of $375 million, up 11% year-over-year on higher fee income and strong insurance business growth, partially offset by credit experience. Reported net income of $382 million included net favorable market-related impacts, partially offset by unfavorable ACMA. Wealth and Asset Management underlying earnings were down 13% year-over-year as higher fee-related earnings were more than offset by negative credit experience. Canada reported record wealth AUM of $185 billion, which is up 20% year-on-year on market appreciation and positive net flows. Group Health and Protection underlying earnings were up 26% year-over-year on business growth in Sun Life Health and higher fee-based income. Group sales were up 4% year-over-year due to higher health sales. Individual Protection earnings were up 19% year-over-year, driven by business growth and higher investment contributions. Individual Protection sales were down by 24% year-over-year due to lower participating policy sales through our third-party broker channel. Turning to Slide 13. Sun Life US underlying net income was US$161 million, up 15% from the prior year. This was driven by strong business growth in employee benefits, Health & Risk Solutions, and higher net investment results in IFM. Reported net income of US$250 million includes favorable ACMA and net market-related impacts. In Group Health and Protection, earnings were up by 13% year-over-year on strong business growth in group benefits and improved group life mortality experience, partially offset by lower dental results. In Dental, we continue to observe the impact of Medicaid redeterminations and the resulting higher average acuity of remaining members, partially offset by pricing updates and claim and expense management actions. Q3 results also included a retroactive premium adjustment back to September 1, 2023, supporting our expectation that states will continue to reflect claims experience when repricing these programs over time. We expect dental results to continue to improve as we re-price the Medicaid book, generate new sales, and further execute on productivity initiatives. US group health and protection sales of $219 million were up 22% year-over-year, driven by higher dental and employee benefit sales. Individual protection underlying earnings benefited from higher net investment results. Turning to Slide 14. Asia's underlying net income of $170 million was up 1% year-on-year on a constant currency basis as higher fee income and business growth were partly offset by mortality experience and the global minimum tax. Reported net income of $32 million includes unfavorable ACMA and market-related impacts. We continue to see strong sales momentum in individual protection, particularly in Hong Kong and India. Asia's strong sales drove new business CSM of $267 million, up 11% over the prior year, and total CSM in Asia increased by 22% year-over-year. Overall, we're very pleased with our results this quarter as we delivered on our medium-term financial objectives while maintaining a strong capital position. Our diversified businesses, supported by our purpose-driven culture continue to position Sun Life for sustained superior growth. As a reminder, on Wednesday, November 13, we're hosting an Investor Day, where we will share further details and updates on our progress, differentiated strategy, and financial leadership. We look forward to seeing you then. With that, I will now turn the call over to David for the Q&A portion of this call.

David Garg, Senior Vice President, Capital Management and Investor Relations

Thank you, Tim. 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 re-queue with any additional questions. I will now ask the operator to poll the participants.

Operator, Operator

Certainly. We will now begin the question-and-answer session. Our first question is from John Aiken with Jefferies. Please go ahead.

John Aiken, Analyst

Good morning. Regarding the retroactive premiums on dental, is there anything else coming your way? Also, does the experience you had in the quarter affect your expectation of recognizing $100 million through 2025?

Dan Fishbein, Executive Vice President

Thanks, John. This is Dan Fishbein. In terms of the retroactive premium, that was for the past year, so a relatively recent period of time and it's clearly a reflection that the states understand that the premiums need to be adjusted to reflect the actual emerging experience in the wake of these enrollments after the public health emergency ended. Of course, a retroactive premium is quite an unusual event, and we're not counting on those, but there are other places and other instances where that could occur. In addition to the retroactive premium, we've obviously been focused on proactive premium adjustments and quite a bit of that has been completed and continues to be effective with each subsequent quarter. In fact, our two largest state contracts have their new prospective premiums effective 9/1 of this year and 10/1. So we'll obviously see a meaningful impact from that starting especially in the fourth quarter. At this point, our efforts are proceeding quite well, our work with the states is proceeding well as well as our own management actions. So we continue to believe that the $100 million for next year is quite possible. It's a very reasonable expectation for us.

John Aiken, Analyst

Thanks for the clarification. Are there any states that haven't determined the retroactive premiums yet, or have you received them for all the states you operate in from last year?

Dan Fishbein, Executive Vice President

No. Generally, that's a very unusual event. We do have some risk-sharing arrangements with states that have been in place for many years. But as far as an ad hoc Retroactive Premium Adjustment, that's a quite unusual event. But as I said, there may be some other limited places where that could occur. Of course, most of the focus, both by the states and us as well as health plans we work with is on prospective premiums.

Thomas MacKinnon, Analyst

Thank you. Good morning. I have a question regarding the credit, which appeared to be somewhat elevated this quarter. Could you explain what was driving that? It might have involved a private loan in Canada. Could you discuss how that might be secured and what it relates to in terms of the yields you are generally seeing? Is this situation unique, or does it indicate something else? I also have a follow-up question. Thank you.

Randy Brown, Executive Vice President

Thank you, Tom. It's Randy Brown. Let me start with a high-level overview. When assessing credit performance, it's important to consider the long-term perspective due to the sporadic nature of credit issues. Over time, our credit losses, which include impairments, net upgrades and downgrades, and expected credit losses, have consistently been lower than the estimates factored into our liabilities. This trend over the years has resulted in losses that are below our anticipated credit outcomes. Occasionally, we experience a spike in credit losses due to individual borrowers facing challenges, which can create a significant impact in any given quarter. In this quarter, the impairments primarily involved a few borrowers facing specific difficulties, notably affecting Canada more than other regions. These unique challenges are taken into account in our assessments. We have a sizable fixed income portfolio exceeding $140 billion consisting of more than 3,000 unique credits, well diversified across sectors and geographies. As a result, we will experience periodic losses, and this instance was just one of the larger ones within the private fixed income segment we have previously discussed. This segment is extensive and highly diversified, featuring strong covenants, collateral protection, and overall ratings that provide both diversification and additional yield, making it a sector that has performed well for us. In this context, the current credit experience is relatively manageable.

Thomas MacKinnon, Analyst

Okay. And maybe just as a follow-up, Dan, 152 LICAT here. That looks pretty good. you're generating capital. Certainly, if you add back the dividend, it's over 100% of your underlying earnings. Your leverage is pretty low at 20.4%. And you've accelerated some of the share buyback, but a high-class problem here to have with this kind of capital position and generating so much excess organic capital. Any thoughts as to what to do with that? Investing in the businesses, buying back stock, the dividend increase you maybe would have thought it would have been higher than the bottom end of your medium-term target. So any comments you can share with us there? Thanks.

Kevin Strain, President and Chief Executive Officer

Tom, it's Kevin. As you know, the business is generating capital and cash at a strong level, just as we expected. Our priorities for using this capital remain consistent. First, we focus on funding organic growth and increasing our dividends, targeting a payout in the range of 40% to 50% based on underlying earnings, which we believe adequately rewards our shareholders. Next, we consider mergers and acquisitions, looking for opportunities that can enhance our scale or capabilities where needed. We maintain pricing discipline to ensure that any M&A activity aligns with our medium-term goals of earnings growth, return on equity, and cash flow. Finally, when we have surplus capital beyond our needs for organic growth, dividends, and M&A, we return that excess cash to our shareholders through our buyback program. Our priorities have not changed, and we continue to monitor this situation. We're in a strong position and will keep deploying capital accordingly.

Meny Grauman, Analyst

Hi. Good morning. Question on expenses. You're targeting $200 million in efficiencies by 2026 on the back of the restructuring you announced last quarter. Just wondering how you're tracking the percentage achieved as of the end of Q3? And then how should we think about expenses for Q4 overall, specifically? Thanks.

Tim Deacon, Executive Vice President and Chief Financial Officer

Hi, Meny. Thanks. It's Tim Deacon, and I would be happy to respond to that question. We're quite pleased with the progress that we've been making in our restructuring program we announced last quarter. So this year, we're on track to deliver about 40% of the savings that we had targeted, and then we're also on track for delivering the remaining savings through 2025 and then into 2026. So you can expect about 80% of the savings will be realized by the end of next year. Most of the savings are going to come across all of our business lines, and particularly in the US and Canada in 2024. Those were some of the business areas that had some of the earlier impacts and opportunities. And when you think about our overall expenses, this program is really designed to help ensure we achieve the higher end of our EPS growth target. So this is really underpinning the results that you're seeing both this quarter and would expect going forward. I would add that there is always some volatility in quarter-to-quarter expenses, mostly in the corporate segment and other areas just from timing of initiatives. And the fourth quarter, we do updates to our overall incentive comp as an example, just based on how the total year-end results reflect. So you can get some volatility from quarter-to-quarter, but overall, very pleased with the progress that we're making and the discipline that we're showing.

Meny Grauman, Analyst

Thanks, Tim. I'm just trying to better understand how much sort of efficiency should we expect for Q4 specifically? Are you able to tell us how far we are along as of the end of Q3 in terms of gauging I'm trying to figure out the cadence here. Is there a bigger bump in efficiency that is expected in Q4 versus Q3? It's hard to tell looking at the disclosure itself, you can appreciate.

Tim Deacon, Executive Vice President and Chief Financial Officer

The 40% I mentioned refers to the total for 2024. There was very little impact last quarter since we just announced it. We saw some impact this quarter, but most of that 40% will be realized in the fourth quarter.

Gabriel Dechaine, Analyst

Good morning. I have a couple of quick questions about the numbers and something related to SLC. You mentioned the retroactive premium is unusual. How significant is that number? Have you already collected it, or are you just going to account for it?

Dan Fishbein, Executive Vice President

Yes. Thank you. This is Dan. We're not to disclose the exact amount of each premium in a contract. But it was meaningful in the quarter. And it is an adjustment to prior premiums that we entered in as an accounting adjustment in the quarter. I don't believe we've yet received the payment, but we have a contract that indicates we will receive that payment.

Gabriel Dechaine, Analyst

Okay. Stop-loss experience, I just want to get a sense of how that has trended for you guys because I've noticed a few of your peers have had some issues and probably were too aggressive in selling the product the past few years. And just wondering if you're relatively shielded from that trend?

Dan Fishbein, Executive Vice President

Yes. I'll talk about our experience, not so much competitors, but as we've talked about over the past few years. During COVID, there was significantly lower health care utilization, particularly on the kinds of claims that would impact stop-loss. However, that utilization, especially over the past year has been recovering back to pre-COVID norms. We understood that. We understood that there was some uniqueness, aberration in the very low utilization and eventually it would recover, as indeed it has. So our pricing has reflected an expectation of normalized utilization as opposed to aggressively pricing to reflect the temporary reduction in utilization. We've always been a very conservative pricer. We work with high-quality brokers who appreciate that. They appreciate the stability and the expertise that we bring, the great people that we bring to the table and the products and services. So while no one is completely immune from an underwriting cycle, our history has been and continues to be a responsible approach to pricing. And indeed, our pricing and our loss ratios remain at or below what we set in our pricing target. So even though the loss ratio has risen compared to the very, very low levels we were experiencing, we are still achieving our targets and our margins.

Gabriel Dechaine, Analyst

Okay, great. Now, to wrap up on SLC, your underlying income, if I annualize it, is $160 million. Can you remind me of your target? I don't have it noted anywhere. Also, regarding the accounting gain of over $300 million related to lower payments to SLC minority owners, what should I take from that? When you made these deals, did you set a price that depended on future sales or AUM growth, which might not be meeting expectations? It's good to see a gain, but it seems the growth isn't occurring as anticipated.

Steve Peacher, Executive Vice President

Hi, Gabriel, it's Steve Peacher. I can address your question about the run rate earnings. This quarter, our underlying net income was $47 million, which is in line with what I consider to be a run rate. The core of our business, primarily management fees, is stable and showing an upward trend due to the growth in assets under management. However, quarterly results can fluctuate due to various factors, such as catch-up fees from fund closings, performance fees, and seed income, all of which can have seasonal variations. These elements tend to balance each other out during the quarter. Regarding our target, from Investor Day a few years ago, we set a goal of $235 million in underlying net income for 2025, and we're moving toward that target. If you'd like, I can also address the second part of your question. We need to account for our liabilities related to the put-call payments. We have three entities with back-end payments remaining: BGO Crescent due in early 2026 and AAM in early 2028. While there are minor variations, these payments follow a similar structure based on a formula that considers an agreed-upon multiple of earnings from the two previous twelve-month periods before the put-call date. For instance, for AAM in 2028, we will average the earnings from 2026 and 2027, apply the agreed-upon multiple, and pay 49% of that value since we would be acquiring 49% of the equity. As we estimate this liability, we must forecast both the magnitude and timing of those earnings. For example, earnings realized in 2026 and 2027 will influence the put-call payment for AAM, whereas earnings in 2028 will not. Thus, both the timing and the amount are important factors. The adjustments this quarter primarily reflect a shift in the timing of expected earnings rather than changes in their magnitude.

Gabriel Dechaine, Analyst

Thank God for transcripts. But is it something that we can conclude that you're saying the timing has pushed back on profit. So something is trending behind schedule or expectations? Or is that not a logical conclusion?

Steve Peacher, Executive Vice President

Well, I think that one of the impacts this quarter is our focus on getting our alternative strategies sold in the retail marketplace. That is a significant trend, and we are just at the beginning of it. We are confident in our ability to achieve this because we have a wide range of alternative strategies. We acquired AAM, a national wholesaling platform in the US, and we have a partnership with Scotiabank in Canada, although we are still in the early stages of that. When we try to predict how AUM will flow and the earnings generated from that AUM in the coming years, there is a lot of uncertainty. As we gain experience, we are making adjustments, but it's difficult to project exactly when AUM will come in three, four, or even five years down the line.

Tim Deacon, Executive Vice President and Chief Financial Officer

Gabe, this is Tim. I might just supplement to everything that Steve said just to summarize overall, this is really timing related. So the liability value that was updated, that only goes to the remaining purchase date. So any of the cash flows that come after that are all to the benefit of Sun Life. And just to add, we've written up these liabilities by over $600 million since the initial acquisition. So $300 million on a net basis after the end of Q3. And all of that was charges to income. So you can see the liability valuation is really sensitive to the timing of these projected results. But overall, that cumulative $300 million increase reflects the positive growth in our AUM, the fundraising and deployment that we've done since the initial acquisition of these businesses. So we're very confident in the long-term value. It's just the timing of when the actual final payment occurs.

Alex Scott, Analyst

Hey. Good morning. Thanks for taking the question. I had another one on stop-loss for you. We heard a peer today actually say that they were going to take 100% pricing action on one-one renewals. And I mean, it just seems like this is potentially setting up to be one of the hardest markets we've seen in stop-loss for a long, long time. You all seem to be much more price adequate than where you sit today. How much of a growth opportunity could that be? How much would you be willing to lean into a business like this where pricing might look a lot better for you next year, but it is still a cyclical business. I'm just trying to gauge appetite.

Dan Fishbein, Executive Vice President

Thank you for the question. We usually don't respond to market dips. It's clear that pricing is expected to strengthen soon, and several of our competitors may need to take significant pricing actions to adjust their businesses. This will create a more favorable market, particularly for us, as we are currently well-priced and do not face such issues. However, we generally do not lower our prices. Our pricing is aligned with the business we pursue, our targets, and our relationships with brokers, who recognize and value that. While the hardening market might present some opportunities, we do not plan to pursue increased market share aggressively.

Alex Scott, Analyst

Got it. Okay. Maybe switching over to MFS, I mean as I look to the results, I mean, one of the places that continues to stand out is just the outflows in institutional, and I heard the commentary on that from the call. But I was wondering, if you could just provide more color on what to expect from that over the next several quarters as we think through 2025. I mean, will we see those outflows temper down? Was it more temporary pressure from specific mandates? Or is there ongoing pressure there?

Mike Roberge, Executive Vice President

Good morning, Alex, it's Mike Roberge. Yeah, I think the retail flows were very similar to what we've talked about prior. And as Tim mentioned, the assets sitting in cash, which as central banks begin to lower rates, we and our partners expect to get better retail net flows. On the institutional side, the last couple of quarters have been impacted by a particular strategy that is underweight MAG 7, and we've seen clients and they're both moving passive as well as active alternatives. We would expect that to moderate. Obviously, we don't know what the next couple of quarters look like. Many times you get them within the quarter, you get redemptions and you see them redeem within quarters. So we would expect those to moderate and improve from here. And what I'd say is as we look into next year, and I've got Ted Maloney here as well, he can mention, talk about is we are seeing some momentum in fixed income institutionally as well as retail. And also, as Kevin mentioned, the launch of active ETFs. So I'll let Ted comment on some of the things we're working on as we move into next year.

Ted Maloney, Executive Vice President

Sure. Good morning. Just real quickly, where we have performance-related flow pressure, as Mike mentioned, it's in actually a small number of strategies, and it's ones that compete against heavily MAG-7 dominated benchmarks and where we're underweight them. So our view on that will be dependent on what happens to MAG-7 as well as how we manage risk around it. But taking a step back, as Mike referenced, we've got a very diversified business across the full spectrum of public equity and fixed income, where performance is measured in most time frames is actually strong across the board notably in fixed income, which is where we do see the most meaningful medium and long-term growth opportunities. So we certainly are aware of the near-term challenges, both in terms of performance-related challenges here, as well as industry exogenous flow pressures, but we're confident in resolving those as well as all of the growth opportunities we have. And as Mike referenced, the launch of the ETFs in a couple of weeks, we think it's both an offensive opportunity and a defensive opportunity, and we're excited about being able to provide our clients with our investment solutions in whatever package works best for them. And we think that as we continue to do that and deliver investment results across the cycle, the flows will once again be positive in the future.

Doug Young, Analyst

Hi. Good morning. Dan, back to you. There seem to be expense pressures on the US dental side of your business due to lower Medicaid membership. However, in the presentation package, it was noted that you are the largest US dental provider with 35 million members. Can you help clarify this discrepancy? Additionally, regarding the expectation of reaching $100 million in underlying earnings next year, how much of that is influenced by expense management? Also, could you provide an update on the sales performance in the dental business for both Medicaid and commercial sectors?

Dan Fishbein, Executive Vice President

Sure. In terms of expenses, what you're looking at there is a year-over-year comparison. Of course, we've had a lot of membership loss in the Medicaid business during that past year. It was about 19.5% of the starting members lapsing due to the Medicaid redeterminations. So while we have cut expenses and driven more efficiencies, that hasn't completely kept up with that loss of membership. However, the membership is stabilizing and actually with new sales starting to grow. We continue to have a robust set of initiatives going on to drive more productivity. So we don't really anticipate expenses being a drag on the business and in fact, an opportunity to make it more efficient over time. In terms of the improved earnings for next year, certainly, our expense initiatives play a role, but it's not a major role. The biggest impact, of course, comes from the pricing actions that are being taken in conjunction with the states, with health plans and getting the pricing to the right place. Another significant contributor are our clean management actions. These are things around utilization management, claim edits, and other management actions that we can take, and that's certainly a contributing factor. I would say the expense actions are the third most important as opposed to a leading component. As far as sales, sales continued to be robust. As you know, in the government market, there are few and far between, but very large. So sales can be lumpy. But for example, in the quarter, we had our first wins ever in California, which is the largest Medicaid market in the country. We won three Medicaid contracts that are expected to be effective July of 2025. And California is a great opportunity for us in the future for significant further growth. There's also a significant pipeline of other Medicaid opportunities. We continue to see Medicare Advantage as a substantial growth opportunity and that growth is certainly underway. And then quite a bit of opportunity in commercial. Our sales are up over 40% in the quarter year-over-year in commercial, and we continue to see that as a very significant part of our growth trajectory in the future.

Doug Young, Analyst

And then just a follow-up, how much of the pricing repricing has gone through? Is it 50%, 60%, 80%, or 90%?

Dan Fishbein, Executive Vice President

So far, on a weighted basis, 91% of the Medicaid contracts have been repriced as of October 1. Some contracts were repriced some time ago, before the full impact of the experience became clear. We evaluated what pricing adjustments were needed to bring the loss ratios back to target levels, and this analysis indicates that we needed to achieve 61%. As of October 1, we have accomplished 61% of what was necessary to restore full margins in the business, which will now contribute to future results. The next question is how to address the remaining 39%. These contracts will require a second round of pricing adjustments in some cases. Fortunately, almost all of them are annual contracts, so there will be further actions this fall and into next year to achieve full pricing levels. Additionally, we are not solely relying on pricing adjustments; our management efforts in claims and expenses are also important in closing that gap.

Kevin Strain, President and Chief Executive Officer

Doug and Dan, it's Kevin. I wanted to add just one quick thing as a reminder, if you look at the quarter, third quarter is a high quarter from claims experience because there's some seasonality to dental. And I think it's important that we keep that in front of us. And Dan mentioned that two of the bigger contracts were 9/1 and 10/1, right? So, if you're looking specifically at the quarter, you need to keep those two things in mind. I just wanted to add that just so that everybody had that perspective.

Tim Deacon, Executive Vice President and Chief Financial Officer

So, we have been making investments in Asia for the last little while. We're really investing across the board in our brand, in talent and technology and digital. And you are, in fact, seeing the results in our bottom-line already. Year-to-date earnings are up 15% year-over-year. As Tim sort of said, our sales were up 17% on the protection side, and we had a record quarter on the wealth side. So, you are seeing the impact of those investments in our results today, Doug.

Doug Young, Analyst

What about the ROE? Any comment on that?

Tim Deacon, Executive Vice President and Chief Financial Officer

Well, the ROE will take time, right? Because you have a big denominator. So, you're not going to move that on a quarter-over-quarter basis. And in fact, you have seen lift in the ROE a few years ago. It was at 10% and now we're kind of trending in the 12% to 13%, and we expect to see further progress as we move ahead.

Mario Mendonca, Analyst

Good morning. I want to set a first question. Dan, if you could just help me understand one thing on this retroactive premium. I appreciate you're not going to get into the size. But was it recorded in experience gains? Is that the right place and driver of earnings to look for?

Dan Fishbein, Executive Vice President

I may need to ask for help from Tim on that one. I think the answer is yes.

Tim Deacon, Executive Vice President and Chief Financial Officer

Mario, it's Tim. Yes, that's where it will show up.

Mario Mendonca, Analyst

Okay. So, the change there went from a loss of $17 million last quarter to a gain of $8 million. Can we use that as an indicator of the size of the retroactive premium?

Tim Deacon, Executive Vice President and Chief Financial Officer

No, because of the seasonality. Sorry, Dan.

Dan Fishbein, Executive Vice President

Yes. Well, Tim, yes, I would say there's three things in there that we need to look at. One is the seasonality. So Q3 is the worst quarter for seasonality in the dental Medicaid business, and for a pretty obvious but interesting reason, it's right before school starts so parents take their kids to the dentist before school starts. Then conversely, Q4 is the best quarter for seasonality. School has begun. It’s before the holidays. So that's actually currently a tailwind for us. But the seasonality is one factor. A second factor is we had progress on the rate increases and the claim action. So there was some underlying improvement in the loss ratio if you normalize for both seasonality and that payment. And then the third item was the payment. So it's the combination of those three, it's not isolated to one thing.

Kevin Strain, President and Chief Executive Officer

There's no real way to tell. That's good enough. Let me move on to a different type of question on MFS. For as long as I've been paying attention to this company, it's one of those unique asset managers that does not grow through acquisitions. In the current environment, would you be more open to M&A with MFS to pick up capabilities, distribution, people that might get you to positive flow center? Is that something you'd consider? Or is that still completely off the table? Mario, it's Kevin. I was going to start with Mike, and I'll let you expand on it, but I know we're aligned on this. Acquisitions in the active asset management sector are challenging and often don’t lead to the anticipated growth. We have strong confidence in MFS’ abilities. I've mentioned their developments in fixed income, the upcoming active ETFs, and the defined contribution space. They have proven expertise in managing assets, and their clients are aware of their strategies. Overall, I'm very satisfied with the contributions MFS makes to our earnings and return on equity. Additionally, we receive 90% of their earnings back as cash, which is significant. When you consider MFS, it fits into our larger asset management platform alongside SLC and our wealth management segments, which are vital for both MFS and SLC, along with our initiatives in Asia. Now, Mike, I'll let you add your thoughts, but I believe we are in strong agreement.

Mike Roberge, Executive Vice President

Yes. Good morning, Mario. As Kevin mentioned, we continue to see substantial opportunities for growth, including the addition of active ETFs to our existing capabilities for retail investors in the US, which presents a significant opportunity for us. 80% of our assets are in equity strategies on an institutional level, while most institutional clients primarily invest in fixed income across various regions. This indicates a tremendous potential for us to expand that segment of our business. Additionally, if viewed from a financial modeling perspective, acquisitions can appear feasible. However, from the client's viewpoint, such actions are often not favored, as they shift attention away from managing assets for clients to integrating different cultures and operations. Historically, we've noticed that during such transitions, we often gain assets from clients who prefer moving to a more stable manager focused on their needs. Therefore, I would echo Kevin's sentiment that we have numerous growth opportunities without the necessity to take on additional risks, and our priority should remain on our existing clients.

Mario Mendonca, Analyst

That's a fine answer. Regarding ROE, I have a list here. I can identify several reasons why SunLife's ROE could be higher and several reasons why it might be lower. I'm uncertain which side of the argument prevails. So, perhaps the question for Kevin and Tim is how do you balance these factors? Can this company achieve a 19% ROE over time, or is an 18% ROE sufficient?

Kevin Strain, President and Chief Executive Officer

Mario, it's Kevin. Our ROE is influenced by the mix of our businesses and their performance. When you look at the numbers, that's where we stand. We are pleased with the mix of our businesses and their resilience, which we've seen throughout COVID and various challenges. We will provide more details next week at Investor Day regarding specific aspects of the businesses and how we drive them. The mix of business should enhance ROE, and we anticipate ROE growth in Asia over time. As DentaQuest resumes contributions, we expect ROE growth in the US, while Canada is performing exceptionally well regarding ROE. Overall, we are satisfied with our business mix and its resilience, which leads to a strong ROE outcome.

Paul Holden, Analyst

Hi. Thanks for making time for my question. So first one is going back to Asia, negative insurance experience in the quarter, I believe you pointed to mortality. At the same time, you see a positive ACMA update on mortality in Asia. So maybe talk to what happened in the quarter, if it's indicative of trend or not?

Manjit Singh, Executive Vice President

Good morning, Paul. It's Manjit. So I'll talk to the first question and let Kevin handle the ACMA question. So in the quarter, the mortality largely related to our international high net worth business; that business does see mortality from time to time. It's just the nature of the business.

Kevin Strain, President and Chief Executive Officer

And Paul, thanks for the question. On the ACMA side for Asia, we did see a positive. The biggest source of that positive in the quarter, we call those related to the Hong Kong refinements. So you can think of these as kind of IFRS 17 post-implementation cleanups. We did review going back to the implementation of IFRS 17. The review is completed now, resulting in a number of onetime gains, both in net income and CSM.

Tom MacKinnon, Analyst

Thank you for the follow-up. I have a question regarding other fee income in Canada. Similar to the previous quarters, it has shown a nice increase, even compared to last quarter. I assume this may be somewhat related to ASO fees, right? Can you clarify if some of those are included? Also, could you explain what contributes to that increase? Thank you.

Jacques Goulet, Executive Vice President

Tom, this is Jacques. There are different components. Obviously, increase in the market to the wealth business increases in fee income. There is also, as you just said, the ASO and the health business and CDCP is also part of that this quarter. That's what you're seeing in there.

Operator, Operator

We have no further questions at this time. I will turn things back over to Mr. Garg.

David Garg, Senior Vice President, Capital Management and Investor Relations

Thank you, operator. This concludes today's call. A replay of the call will be available on the Investor Relations section of our website. Thank you and have a great day.

Operator, Operator

This brings to an end today's conference call. You may disconnect your lines. Thank you for participating, and have a pleasant day.