Sun Life Financial - Earnings Call - Q1 2025

Transcript

Operator (participant)

Good morning and welcome to the Sun Life Financial Q1 2025 conference call. My name is Gaylene, 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. To join the question queue, you may press star then one on your telephone keypad. The host of the call is Natalie Brady, Senior Vice President, Capital Management and Investor Relations. Please go ahead, Ms. Brady.

Natalie Brady (SVP of Capital Management and Investor Relations)

Thank you, and good morning, everyone. Welcome to Sun Life Financial's earnings call for the first quarter of 2025. 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 two, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events.

With that, I'll now turn things over to Kevin.

Kevin Strain (President and CEO)

Thanks, Natalie, and welcome to the call to you and to your new role and to everybody who's on the call this beautiful Friday morning. Turn to slide four. Our results this quarter highlight the strength of our balanced and diversified business mix, an important attribute in an increasingly complex operating environment. We achieved top and bottom line growth across all of our businesses. Our underlying EPS was CAD 1.82, up 21% year-over-year. Underlying net income was a record CAD 1.045 billion, and reported net income was CAD 928 million. Underlying ROE was 17.7%. Asset management and wealth saw strong earnings growth, particularly in SLC Management and Asia, driven by higher fee income and seed investment income. Additionally, we saw strong asset flows across SLC, Asia, and Canada. Group health and protection earnings and sales growth were led by Canada.

Individual protection earnings were higher year-over-year, with sales growth across the board. In Asia, we're seeing good momentum, with sales driven by continued distribution strength in Hong Kong and India. Our leadership position in the Philippines and the launch of our partnership with CIMB Niaga also supported our sales growth. Our capital position remains strong, reflecting our financial discipline and capital-light businesses. Our LICAT ratio at SLF remains strong at 149%, and cash at SLF Holdco level was CAD 1.3 billion. Reflecting this capital strength, we bought back CAD 520 million of common shares during the quarter. This quarter, we are pleased to announce a 5% increase to our common share dividend and are renewing our normal course issuer bid to enable continued share buybacks pending regulatory approval.

We are confident in the resilience of our business mix, our focus on executing our long-term business strategy, and our sustained commitment to deliver on our purpose. Turning to slide five, we highlight our progress against our strategic imperatives. We saw good performance across our asset management and wealth platforms. SLC Management raised CAD 4.4 billion in the quarter, including strong demand in BGO's Asia Value Add real estate fund series. Fee-earning AUM surpassed CAD 200 billion, driven by a large insurance mandate for fixed income and increased BGO Asia deployments. These results reflect the scaling of our SLC platform. At MFS, we continue to experience solid fixed income flows, generating approximately $1 billion in flows. MFS also won the 2025 US LIPP Award for fixed income, recognizing consistently strong relative returns over a three-year period.

Beyond that, MFS is seeing strong early momentum for their active ETFs, which first launched last December. In Canada, our group and individual wealth businesses also demonstrated attractive growth. We achieved strong sales in our group retirement services business, supported by large case and rollover sales in Defined Contribution, and in our individual wealth business, SLGI, grew well. Our Asia business delivered good results on higher protection sales growth and higher wealth management earnings. In India, individual protection sales were up 35%, demonstrating growth in our banker and direct channels. Our India asset management joint venture grew AUM by over 20%, underpinned by higher fixed income and other fund sales. Growth in India has been a consistent and robust driver of growth over the past few years and highlights the good growth in the Indian economy and our strong capabilities there.

In Hong Kong, our agency and banker sales channels have contributed significantly to the growth of individual protection sales. Our agency sales growth was driven by both increasing the size of our sales force and increasing productivity. Our bancassurance channel continued to perform well, with strong results from our partnership with Dongxing. While our broker channel remained a stable source of sales, we continue to diversify and accelerate our momentum in this attractive, fast-growing market. In health, we continue to show strength and resilience in our Canadian health business. Higher large case deals contributed to very strong sales in the group health and protection business. Earnings were strong, and we continue to be the scale leader in this market. In the U.S., our management team continues to take action, and we saw a positive shift in the performance across businesses.

We continue to experience growth in our U.S. employee benefits business, driven by disciplined pricing, our focus on claims and expense management, and our strong technology capabilities. Results in stop loss improved significantly from the prior quarter, as our pre-2025 cohorts of business performed in line with expectations we provided at the end of 2024. As noted last quarter, we have added two percentage points to our claims expectations for the January 1, 2025 cohort, reflecting the higher claims experience we saw at the end of 2024. Our strong capabilities in this business and leading scale continue to give us confidence. Dental results continue to stabilize, reflecting a mix of improved pricing, beneficial claims experience, and expense discipline, as well as the benefit of a retroactive payment in the quarter. We continue to make it easier for our clients to do business with us by delivering streamlined digital experiences.

Group retirement savings clients in Canada can now set up money movements within minutes. We plan to build upon and scale this functionality, integrating it into other client processes and experiences. We also launched several client portals, including a new client mobile app in the Philippines. In the U.S., we introduced the Your Benefit Concept portal, designed to support absence and short-term disability management. This new portal features a streamlined claim filings process, provides valuable insights to help clients manage their benefits, and offers an employer dashboard to help them more effectively manage their business. Underpinning our strong business performance are our people and culture. We were recognized as the best place to work in Canada and in Ireland for the third year in a row. Achieving this recognition is a reflection of our positive culture and our care for people who are at the heart of Sun Life's success.

I'm also pleased to congratulate Helena Pagano, Sun Life's Chief People and Culture Officer, on being recognized as the winner of the 2025 Global Mills Report on Business Best Executive Award. Helen's exceptional leadership and innovative approach continue to drive our organization forward, empowering our people to thrive and grow. We're proud of her well-deserved recognition. Additionally, congratulations to Melissa Kennedy, Sun Life's Chief Legal and Public Policy Officer, for being named one of the top general counsels by Chambers and Partners. This award recognizes outstanding in-house lawyers who significantly impact their organizations and clients, as well as reflects Melissa's contribution to our company, the legal profession, and the industry at large. These awards reinforce the invaluable experience and vision Sun Life's global leadership team brings to our organization. Guided by our purpose, our dedicated leadership, and their teams blend global strengths with local expertise, driving our continued success.

All in all, Q1 was a strong start to 2025, despite the challenging political and economic conditions. We continue to watch both the geopolitical environment and the economy closely. Sun Life Financial has been in business for 160 years and operates in 28 markets around the world, giving us the tools to manage challenging conditions. Our business mix, prudent risk management capabilities, and strong capital position provide resiliency to our company. With that, I'll turn the call over to Tim, who will walk us through the first quarter financial results in more detail.

Tim Deacon (EVP and CFO)

Thank you, Kevin. Good morning, everyone. Turning to slide seven, we are pleased with our first quarter 2025 results, which reflect strong performance across each of our operating segments. We have reported record underlying net income of CAD 1.045 billion, up 19% year-over-year, while underlying earnings per share of CAD 1.82 was up 21% over the same period, reflecting strong performance over our Q1 2024 results. Asset management and wealth underlying earnings were up 19% over the prior year on higher fee income and higher net seed investment income at SLC Management. Group health and protection underlying earnings were up 18% year-over-year, driven by business growth, favorable insurance experience in Canada, and improved U.S. dental results, partially offset by moderately unfavorable morbidity experience in U.S. medical stop loss in line with expectations.

Individual protection underlying net income was up 20% over the prior year, driven by business growth and higher joint venture contribution in Asia and improved protection experience in Canada. Underlying return on equity was 17.7%, a strong improvement from the prior year and prior quarter. Reported net income for the quarter was strong at CAD 928 million. The variance between underlying and reported net income included acquisition and integration-related items at SLC Management and U.S. dental, amortization of intangible assets in Sun Life U.S., and modestly unfavorable market-related impacts. Market-related impacts reflected unfavorable equity markets and adverse real estate experience, partially offset by favorable interest rate impacts. Real estate returns were positive in the quarter, but were below our long-term return assumptions. Total CSM, which is a store of future profits of CAD 13.6 billion, increased 12% year-over-year, driven by strong organic CSM growth and currency impacts.

New business CSM of $406 million was up 17% year-over-year, driven primarily by strong margins in Hong Kong. Organic capital generation net of dividends remained solid at CAD 308 million, within our target range of 30%-40% of underlying net income. Our balance sheet and capital positions remained strong, with an SLF LICAT ratio of 149%, which was down three percentage points from the prior quarter, as organic capital generation was more than offset by share buybacks and the investment in our expanded bancassurance agreement with CIMB Niaga in Indonesia. Holdco cash remained solid at CAD 1.3 billion, and our leverage ratio remains low at 20.1%. Finally, book value per share increased by 9% over the prior year and by 0.5% quarter-over-quarter, demonstrating our ability to generate strong growth while returning value to our shareholders, with 6.4 million shares repurchased this quarter under our share buyback program.

With only 2 million shares remaining under the existing normal course issuer bid, we announced today the intention to renew our NCIB program to purchase up to an additional 10 million shares, subject to regulatory approval. Turning to our business group performance on slide nine, MFS's underlying net income of $186 million was down 2% year-over-year, as higher average net assets and lower expenses were more than offset by lower net investment income from declining rates on lower cash and short-term investments and the impact of fewer fee-earning days in the quarter. Reported net income of $190 million was up 6% year-over-year, driven by declines in the fair value of MFS's shares owned by management, primarily from the sequential decline in AUM. Pretax net operating margin of 35.4% decreased by 1.8 percentage points over the prior year, driven by the lower net investment income.

Assets under management of $604 billion were down 4% over the prior year and was in line with the prior quarter. The sequential movement in AUM was driven by net outflows, partially offset by market appreciation. Outflows of $8.1 billion included retail outflows of $6.2 billion and institutional outflows of $1.9 billion. Retail outflows accelerated this quarter as investors continued to shift assets to risk-free instruments in light of the current equity market uncertainty. While institutional outflows improved from the prior quarter, we continued to see client activity to rebalance and restructure select strategies. Overall, long-term investment performance for MFS remains good, with 92% of fund assets ranked in the top half of the respective Morningstar categories for 10-year performance. Fixed income performance was strong, with 98% of fund assets ranked in the top half of Morningstar on a 10-year basis.

Turning to slide 10, SLC Management generated record underlying net income of $85 million, more than double over the prior year, driven by strong growth in fee-related earnings and higher net seed investment income from strong asset performance, particularly in real estate. Fee-related earnings of $99 million were up 43% year-over-year, driven primarily by catch-up fees from strong capital raising at BGO. Catch-up fees are typically earned on the final closing of a fund. Reported net income of $55 million was up 31% over the prior year, reflecting higher underlying net income, partially offset by a gain in the prior year on the early termination of a distribution agreement. SLC Management continued to generate strong capital raising with CAD 4.4 billion raised this quarter, with strength across all affiliates, particularly in BGO Asia and private credit.

SLC fee-earning AUM of CAD 201 billion was up 13% year-over-year, driven by deployments and market appreciation. Turning to slide 11, Canada delivered solid results with underlying net income of CAD 376 million, up 21% year-over-year, driven by favorable insurance experience, strong business growth, and higher fee income. Reported net income of CAD 351 million was up 21% year-over-year on underlying net income growth. Asset management and wealth underlying earnings were up 3% year-over-year, driven by fee income growth on AUM. Canada reported record wealth AUM of CAD 190 billion, which was up 10% year-over-year on market appreciation and net inflows. At SLGI, gross flows increased 42% year-on -ear, driven by strong mutual fund sales growth during the RRSP season.

Group health and protection underlying earnings were up 27% year-over-year on business growth and favorable morbidity on shorter claims duration and favorable mortality, reflecting lower claims severity. Group sales were up 21% year-over-year by higher large case sales. Individual protection earnings were up 37% year-over-year based on favorable insurance experience. Individual protection sales were up 7% year-over-year, driven by third-party and SLFB sales. Turning to slide 12, Sun Life U.S. underlying net income was $151 million, up 7% from the prior year. In group health and protection, underlying earnings were higher by 4% year-over-year. In stop loss, results improved significantly over the prior quarter, as claims experience was in line with our estimates last quarter and included the expected 2% pricing shortfall for the January 1st, 2025 cohort.

In dental, we benefited from pricing actions on the Medicaid business, including a retroactive premium payment this quarter, the second in the past year, and from ongoing expense efficiency actions. US group and health and protection sales of $107 million were down 13% year-over-year, driven by lower government dental sales due to lower RRFP activity and lower employee benefit sales as we remain disciplined on pricing. Individual protection underlying earnings were up year-over-year, primarily driven by higher net investment results. Reported net income of $129 million increased year-over-year, driven by favorable market-related impacts and higher underlying net income. Turning to slide 13, Asia posted record underlying net income of $197 million, up 11% year-over-year.

Results benefited from business growth, higher contributions from joint ventures, and fee income growth in wealth, partially offset by lower earnings on surplus and unfavorable mortality in the high net worth segment. Reported net income of CAD 166 million was lower year-over-year, reflecting a prior year gain on the partial sale of our asset management joint venture business in India. We continue to see strong sales momentum in individual protection, up 17% year-over-year, as we observe solid sales growth across virtually all markets. Asia's total CSM of CAD 6.2 billion grew 29% year-over-year, driven by strong organic CSM growth and currency impacts. New business CSM of CAD 273 million was up 19% from strong margins in Hong Kong. In summary, we are pleased with the overall quality of our results this quarter, demonstrating the earnings power of our diversified businesses.

We remain laser-focused on execution in delivering towards our medium-term financial objectives. Our strong capital levels make us both well-positioned to navigate the uncertainties in the current macroeconomic environment and to capitalize on the potential opportunities that may lie ahead. With that, I will pass it back to Kevin for some closing remarks before we open it up for Q&A.

Kevin Strain (President and CEO)

Thanks, Tim. As you note, the resiliency created by our business mix and our ability to execute were key to our strong results this quarter. We know that the most important thing we can do in these challenging and uncertain times is bring value to our clients and focus on our purpose, helping clients achieve lifetime financial security and live healthier lives. That is what we do. That drives us and shapes who we are.

Tim Deacon (EVP and CFO)

At the same time, we have a deep understanding of the markets where we operate. We have strong relationships with government, businesses, and individuals. We do everything we can to be part of the fabric of those countries, bringing a global understanding and view while delivering local impact. With that, I'll turn the call over to Natalie for the Q&A portion of the call.

Natalie Brady (SVP of Capital Management and Investor Relations)

Thank you, Kevin. To help ensure that all participants have an opportunity to ask questions this morning, please limit yourselves to one or two questions and then re-queue with any additional questions. I will now ask the operator to poll the participants.

Operator (participant)

Thank you. To join the question queue, you may press star then one on your telephone keypad. You'll hear a tone acknowledging your request. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star then two. Our first question is from Meny Grauman with Scotiabank. Please go ahead.

Meny Grauman (Analyst)

Hi, good morning. If I look at your Asia performance on the sales side, it doesn't seem like tariffs or tariff uncertainty is having an impact yet. I am wondering, as you look forward, what's your expectation there?

Manjit Singh (President of Asia)

Good morning, Meny, It's Manjit. As you noted, we had a very good quarter this quarter with sales up 17% on a year-over-year basis. That was broad-based as well. As Tim mentioned, we are up in six of eight markets. Also, in terms of our channel mix, we were up across agency, bank, and broker. Obviously, as you know, we're dealing in a very fluid environment right now. It's a little bit difficult to understand or see where the world is going to be going. I think what we focus on, as Kevin said, is on our client and making sure that we're fulfilling the needs of our clients. We're also very pleased with our business fundamentals. We have a strong brand. We have good distribution. We have a good client proposition. I think that'll position us well to manage through this environment.

Meny Grauman (Analyst)

Thanks, Manjit. If I could just ask on the U.S., just in terms of we've seen quite a bit of volatility in earnings over the last few quarters. Definitely, this quarter looks like the momentum is moving in the right direction. From an earnings volatility perspective, is your expectation that the volatility will come down, or should we still be prepared for some ongoing volatility in this unit as we look ahead?

Dan Fishbein (Executive Chair of U.S.)

Thanks, Meny. It's Dan. Good morning. I would characterize it's maybe not so much as volatility, but seasonality and cyclicality. The businesses we're in now, and they've obviously become quite a bit larger and a bigger part of the whole, have a unique seasonal and cyclical set of patterns to them. They're different across the different businesses. Obviously, there are some challenges that we've been facing in the dental business, and we're working hard to address those. Those are not by no means completely behind us. The stop loss business, as you know, had some increase in severity in the fourth quarter. We're pleased with the first quarter results and the way that has stabilized and even improved somewhat. That issue, of course, is something that will happen from time to time in stop loss. Each of these businesses has its own seasonal pattern.

If you look at these businesses over a year-long period or a two or three-year period, you're going to see them all very nicely performing. From quarter to quarter, we're likely to still have some variance. That's not necessarily a bad thing. It's just the nature of these businesses.

Kevin Strain (President and CEO)

Meny, can I add? I'd like to add one thing too, because that happens particularly in the health side where you can get things like flus and medical costs. We can typically reprice that over one, two, or three years. Again, we don't see that as that's natural to the business. The way the business is structured, we can reprice for those higher medical costs or those impacts that have happened. That is what Dan and his team are doing. They do very well. Having scale is important to doing that. We do have scale in both our health businesses in Canada, but also our health businesses in the U.S.

Meny Grauman (Analyst)

I guess just to follow up to that, Kevin, is just in terms of is there anything that you can continue to do that you're not doing that can minimize that seasonality or take that volatility?

Kevin Strain (President and CEO)

I think Dan and Jess are doing everything they can, but we can't control when there's a bad flu season or the medical costs in the U.S. What we can control is how we treat our clients, how we do our repricing, the discipline we bring to our business, and how proactive we are in managing expenses and those types of things. I think we're doing everything we can on those. I have confidence that we're doing all the right things. Coming back to it, having scale is really important to being able to see yourself through those fluctuations and those changes.

Meny Grauman (Analyst)

Excellent.

Operator (participant)

The next question is from Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Hi, good morning. Just a question about your group businesses. Both sides of the border. I'm just thinking about expected profits or whatever it's called and how you model that out. Typically, we think about claims, incident rates, severity, all that stuff. Just wondering what sort of employment environment do you have or assumptions do you have underpinning your expected profits in that business over the next year or two, if that applies? Because we've obviously got some flat employment trends and maybe some sectors of the economy that are facing more significant scenarios. If you can shed some light on that, that'd be very helpful.

Kevin  Morrissey (SVP and Chief Actuary)

Hi, Gabriel. It's Kevin Morrissey. Thanks for that question. Generally, when you're looking at those group businesses, that's the earnings on short-term business. What you're seeing in that line of the DOE is based on the pricing assumptions. As you know, that business is repriced one, two, or three years. It's really a short-term horizon on that in terms of the expectations underpinning that. In each one of the geographies, it would be kind of the outlook that we have in each of those geographies for that time horizon. It's closely monitored and updated as we see the circumstances changing.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

You got price times volume equals revenue or whatever. There is an element of job growth in there, I got to assume, or is that insignificant in your outlook?

Kevin  Morrissey (SVP and Chief Actuary)

We would include all of the economic factors as well as experience components as well. What we're seeing in terms of, excuse me, trends on claims and costs as well as economic factors, all of that would be incorporated into those expectations in the pricing. That is what would show up in that DOE line.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Would that one fluctuate real-time sort of thing?

Kevin  Morrissey (SVP and Chief Actuary)

Usually, we reset those once a year. You are going to see that stable in the DOE for a year and then kind of a reset based on the latest pricing each year.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Okay. My quote-unquote second question. The Asia business, I know there are some FX tailwinds, but I see a 14.6% ROE in the quarter. Your medium-term target is 15%+. Looks like you're ahead of schedule there, but I don't know if that's actually the case. Was there anything unusually positive this quarter? You talked about some margins and enhancement in Hong Kong. I just want to see how sustainable that figure is, really. Good.

Manjit Singh (President of Asia)

Yeah. Good morning, Gabriel. It's Manjit. Yeah. No, we're very pleased with the results of our business this quarter. As I spoke about earlier, our sales were strong. We're also building good momentum across our business on both distribution and client proposition. We also launched this quarter our deal with CIMB Niaga. So we feel very good about the momentum in our business and going forward. There was nothing that I would say was unusual in our results for the quarter.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

That number is kind of a good run rate?

Manjit Singh (President of Asia)

I think, no. Obviously, that'll be impacted by how the environment unfolds in front of us. If the environment remains the way it does, I would say that's a good run rate.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Okay. Thank you. Enjoy the weekend.

Operator (participant)

The next question is from Tom Gallagher with Evercore ISI. Please go ahead.

Tom Gallagher (Analyst)

Good morning. A few questions for Dan on the U.S. When you said the U.S. stop loss has stabilized and even improved somewhat, can you give a sense for how much of that is informed by actual claim emergence in the book? Because I know it takes a bit longer over the course of the year to see claims. I think there are probably some leading indicators you have underneath the surface. Is it a claims emergence, or is it more of a broader macro assumptions you are looking at to make those observations?

Dan Fishbein (Executive Chair of U.S.)

Thanks. As you know from the conversations we had and even from the lunch and learn that many people went to, we look at this business in terms of different cohorts. The cohort from a big part of the experience is the 1124 cohort, as well as a smaller but still meaningful piece was the non-1124 cohort. That is largely based on claims experience emerging. In the first quarter, those two cohorts combined actually were a little bit favorable to where we had set them at the end of the fourth quarter. The other big part of the experience this quarter is the 1125 cohort. That is almost entirely a reserve pick. There have been very few claims at this point. As we mentioned last quarter, since the higher severity and stop loss emerged at the very end of the year last year, that cohort had already been priced. Even though we got a robust 14% rate increase on that business, we now feel that we really needed 16%. We were short about 2%.

That's a meaningful part of the experience this quarter as well as we continue to have that extra 2% in there.

Tom Gallagher (Analyst)

Dan, on the 25 cohort, whether it's the 50% claims report or otherwise, do you have any real emergence, or does that take a couple more quarters to be able to determine how the development on claims are looking on the 25 cohort?

Dan Fishbein (Executive Chair of U.S.)

Yeah. In the first quarter, you see very little real data, even on the 50% claim reports. Right? The coverage was effective for the plan year starting January 1st. In those first three months, you're not typically going to see much. We'll start to see a little more each quarter. Of course, as we've discussed, you really see most of those claims in the fourth and fifth quarters of that cohort year. We'll start to see some of the 50% reports in the second and third quarters. We'll start to get a little better idea. At this point, it's largely a reserve pick.

Tom Gallagher (Analyst)

Gotcha. Thanks. My follow-up is just on the comment about lower employee benefit sales that you were disciplined on pricing. Where are you seeing the most price competition? Is it true group, voluntary? Also, how is your persistency holding up through some elevated competition?

Dan Fishbein (Executive Chair of U.S.)

Yeah. I think where we're seeing the most price competition is in the disability lines. For the past several years, there's been highly favorable disability experience and continuously improving across the industry. There's a number probably of system-wide factors for that, including the more use of remote and hybrid work, which enables people to get back to work in ways they didn't used to be able to.

We're seeing the competition starting to put some of that favorable disability experience into their pricing. If you think of the business in three components: disability, life, and voluntary, we're actually doing very well in the life and the voluntary, which is voluntary is an area we really want to grow. We've been more cautious in disability because of that price competition.

Okay. Thank you.

Operator (participant)

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

Doug Young (Analyst)

Hi, good morning. Dan, maybe we can stay with you. Just looking at U.S. group sales on the dental, specifically that Medicaid and Medicaid Advantage, weaker versus what we've seen in the last few years. Maybe you can kind of talk about a little bit what you're seeing there and how this informs your underlying earnings growth that would look for this business. Maybe if you can weave in, obviously, there's a fluid situation with the administration in the U.S., and who knows what's happening. Any concerns that you have in terms of changes to those two businesses in particular? I have a follow-up.

Dan Fishbein (Executive Chair of U.S.)

Yeah. Thanks. There's a whole set of questions and answers there that I want to provide. First of all, it's a very good observation that the conversations coming out of Washington are having a lot of secondary influence here. We don't see what's been proposed in Washington as having a lot of direct impact on dental benefits. 75% of the Medicaid coverage we have is kids, and nobody's really talking about cutting Medicaid benefits to kids. In the adult coverage, while there could be some impacts, we feel they're fairly modest. The bigger impact that's having is that overall Medicaid funding is definitely under a lot of pressure. We work with states that fund Medicaid, not just in dental, but much more significantly in health. We work with a lot of health plans as a subcontractor that do the same.

They are feeling quite a bit of uncertainty and pressure on their revenues going forward. That is making some of the second round of renegotiations that we are engaged in this year to get our pricing back to where it needs to be go somewhat more slowly than perhaps we had hoped or expected. That is certainly a factor. I also should mention that in the dental results, we did have a retroactive premium payment from one of our large clients, which was great. In fact, it is the second retro that we have gotten in the last three quarters. We do think this may be a regular part of the business, but not routine. We do not expect another retro payment specifically in the second quarter. That is a bit of a relative headwind to the results in the first quarter going into the second quarter.

In terms of the impact on sales, we have noticed, again, due to the uncertainty that some of the RFP timelines have slowed down. In the first quarter, that tends to be a small quarter for sales the way we record them. Also, large institutional government sales are lumpy. A small number are very large things. There were none in the first quarter. Despite all that, we have nine significant Medicaid contracts we're bidding on this year, representing almost 5 million potential lives. There is a robust pipeline, but perhaps the timelines have slowed down just a bit.

Doug Young (Analyst)

Just to follow up, Dan, this does not impact your underlying earnings progression for this business, sir, because obviously, you have laid out targets for this year and for 2029. Can you quantify the retro payment size?

Dan Fishbein (Executive Chair of U.S.)

Yeah. The retro payment applied to the current fiscal year. In the case of that client, that fiscal year started 9/1. There is a part of that retro payment that applies to the first quarter and a part that applies to the 9/1-12/31 period. That was in the single digits. Still very helpful, but not particularly large. In terms of our progression towards the target for this year, we're still very committed to that number, working very, very hard to get there. The long term, the MTOs we laid out in November for the dental business are still very much our plan and intention. As I mentioned, I think because there was a retro in the first quarter that would not recur in the second quarter, we would not necessarily see the same result in the second quarter that we did this quarter.

Doug Young (Analyst)

That's fair enough. I guess Kevin and Tim, you both said you talked about the financial strength of the organization, the amount of capital you generate, the amount of capital you have, your debt capacity. Yet the increase in the NCIB is 10 million. It was 15 million previously. It's a question that's coming up in a lot of conversations I'm having. Why not have another 15 million NCIB? Is there a message that's being sent here? Can you just maybe walk through your thought process?

Tim Deacon (EVP and CFO)

Sure, Doug. It's Tim. As you said, we have a very strong capital position. We have strong hold co-cash. We have been able to maintain that despite paying out dividends and the share buybacks, etc. That is in a really good position. We have a leading capital ratio at 149%. We just did $12 million. We have $2 million remaining and wanted to remain active. We also wanted flexibility going forward. We were applying for $10 million. That is really because as we look ahead over the next 12 months, we have also some planned upcoming capital deployments. The remaining equity that we do not currently own within our SLC affiliates, that buyup is occurring in the first half of next year. That is about $2.3 billion. You can see that in note four of our financials.

It really reflects for us to have that flexibility to remain active in the program, but also to be able to meet our future commitments as well.

Kevin Strain (President and CEO)

Doug, I would just add one thing. I think if we look at the current economic conditions and where things are at, there's significant risk going forward in a lot of parts of the economy. We are going to be carefully looking at that and how we deploy capital. When we do buybacks, it's when we have cash flow and the ability to do it. Having that, this is not an unusual time. I think being ready and prepared for that unusual time is important.

Doug Young (Analyst)

Makes sense. Appreciate the color. Thanks.

Operator (participant)

The next question is from Tom MacKinnon with BMO Capital. Please go ahead.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

Yeah. Thanks. Question with respect to SLC. Obviously, catch-up in fees here certainly has helped revenue in the quarter. I think several years ago, you gave a guide of 235, correct me if I'm wrong, for 2025. How are you thinking about that, just given, I guess, the bump-up we saw in the first quarter, the stronger capital raises you have? How should we be looking at that number in 2026 progressing and then progressing in light of what I believe would be the buyups of the minorities here, which, and correct me if I'm wrong, is it 25% of SLC that you would be buying in associated with that $2.3 billion that you're talking about? Thanks.

Steve  Peacher (Executive Chair of SLC Management)

Tom, thanks for the question. It's Steve. We're on the 235. You're right. That's the target that we put out. We feel good about that number for the year. This quarter was certainly elevated because of the catch-up fees that Tim mentioned. Also, we had some seed income. It was above a normalized level for us. This business is pretty stable because you've got base management fees. If you were to look at our core management fees, they were up about 8% year-over-year. You've got some things that are variable. Catch-up fees can fluctuate quarter to quarter. We almost always have some. This was a bigger quarter. We've got some other things that fluctuate quarter to quarter. Seed income, which generally is positive, but we've had some quarters where that's been negative. Property management fees can be seasonal.

We've got performance fees, which generally have been low, but we expect those will increase over time. There are some aspects to our quarterly results that can fluctuate around a pretty stable base. We feel good about the 235 number for this year. We think as we look beyond that into 2026 and beyond, we expect to have really solid growth. I think we've got good momentum in the business. If you look at our AUM, year-over-year, we're up 12%-13% if you look at fee-earning AUM or AUM. I don't think we're only now really starting to harness this as a platform. Up until now, we've basically had a bunch of individual businesses that we let operate on their own. Now, only now, we're really starting to think about this and operate as a platform.

I think that's going to help us accelerate our growth going forward. There are always headwinds and tailwinds. You've got, as Kevin mentioned, this is an unusual time. Some of those, there are puts and takes to that. One thing that we have seen is we have a global investor base. For investors outside the U.S., we have seen some emerging reluctance to allocate into the U.S. for different reasons. That's not catastrophic, but something we're seeing. You always have things in your favor, and you always have things that you're battling against.

Kevin Strain (President and CEO)

Steve, I just want to mention one thing. When you see these catch-up fees, the larger they are, the better they are. That means we raise more funds. We were more successful. Investors are really interested. You should see these catch-up fees as being a really positive endorsement of the alternatives business and, as Steve said, a natural part of how the alternatives business works. We're pretty pleased with the Asia fund that BGO had launched and just the success in getting money there and deploying money. That catch-up fee is a recognition of that. The other thing on this, as SLC grows, and we expect to see SLC grow, an important piece is helping with seed money and helping start new funds. That's when you're seeing some of those seed investment earnings come through like they did this quarter. When those are positive, that's also a good thing. It means that we're getting strong performance in the start of those funds. I think these are normal parts of the alternatives business and you should see them both as being very positive.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

On the minority, is that 25%? Is that what you're saying?

Steve  Peacher (Executive Chair of SLC Management)

It's a good question. The answer is a little bit more complicated because we have different percentages interests in different businesses. We completed the buyup of InfraRed, so now we own 100% of that. We own all of our fixed income business. We've got a majority interest in both Crescent and BGO, but high minority interest there that we'll be buying out. The other factor is, as we think about the go-forward structure, we expect employees to own a portion of this business as you would see with most SLC businesses out there. We think that's important to LPs, and we think it's important to alignment. We're working through that now. The specific % that we'll end up owning is there's some moving parts there is what I'll say.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

What percentage would the employees own?

Steve  Peacher (Executive Chair of SLC Management)

If you look at, let me put it this way. We spend a lot of time looking at the universe. If you look at the universe of all firms, it's not uncommon to see employees own 20% of a business. That's if you look across the landscape. I think if you talk to the big institutional investors out there, it's really important to them to see employees align through things like carried interest, but also ownership in the entity. We're taking all that into account.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

The $2.3 billion that you've noted in your financials is for Sun Life to buy some remaining portion of it and not for the employees. Is that correct?

Steve  Peacher (Executive Chair of SLC Management)

Yeah. Tom, that figure assumes that we buy up 100% of the remaining interest that we don't own.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

Okay. Is that still the plan? I mean, you would not book it in your notes if the employees were going to be buying it. Is that correct?

Steve  Peacher (Executive Chair of SLC Management)

Let me just say that all of that was in process to think about how we align the incentives going forward. These are active discussions, and we want to make sure we get that right. Today, that liability reflects us the assumption that we'll buy 100% of the business.

Tom MacKinnon (Managing Director and Senior Equity Analyst)

Okay. Thanks for that.

Operator (participant)

The next question is from Paul Holden with CIBC. Please go ahead.

Paul Holden (Analyst)

Thank you. Good morning. Going back to the U.S. business, sorry to keep you busy, Dan, but going back to the U.S. business, when I look at that expected profit line on short-term business, it is up roughly half a percentage point year-over-year. How do I think about that? Obviously, I think you have kind of addressed the higher claims loss assumption on stop loss. Are there any other factors that are kind of holding that back from being a higher growth rate? Will that evolve over the course of the year? Does that kind of set sort of an expectation for the remainder of the year?

Kevin  Morrissey (SVP and Chief Actuary)

Hi, Paul. It's Kevin Morrissey. Thanks for that question. I just wanted to give you maybe a bit of the details of how that line is determined. Kind of that expected earnings on that type of business is really based on the profitability and the expectation. When you see the growth year-over-year, it's really going to be driven by the volume of business that we have in force and the pricing expectations on that. It's kind of the combination of those two. Those are what are going to drive the changes year to year. As the business comes on, that would naturally update each quarter. On the pricing side of that, that's updated once a year.

Paul Holden (Analyst)

Yeah. Okay. Okay. Second question is related to stop loss premiums. Up 4% year-over-year, which is obviously different than the rate increases being put in through closer to 14%. I just want to make sure I understand that correctly. Is that just because simply not all customers wanted to take the rate increase?

Tim Deacon (EVP and CFO)

Yeah. So a couple of factors there. First of all, recall that when we say there's a 14% increase, that's the increase if they kept benefits the same. But many times when stop loss clients are facing a rate increase, they'll buy down the benefit by taking a bigger deductible. So the net rate increase is usually, coincidentally, about half. So if you get a 14% rate increase, you might have a 6%-7% impact on revenue. So now, you know with the 4.5% increase year-over-year in revenue, that that does not seem like a great deal considering the rate increases. That is true. We've been emphasizing maintaining our margins over significant growth at this point in the underwriting cycle. Our loss ratio right now is solidly in the mid-70s.

You may have seen a couple of large competitors report loss ratios over the past week of 90% or above. One of the ways that we keep that loss ratio very favorable, that, by the way, generated a 9.5% after-tax margin in the stop loss business in Q1, which is above our target of 8%. The way we're able to do that is by being conservative on pricing at this point in the underwriting cycle. As others start to put through bigger rate increases and the market hardens, we would expect to see sales and net growth pick up. In fact, sales in the first quarter, which is generally a small quarter for sales, were higher than in the first quarter of last year. We hope we're at the beginning of that part of the cycle now.

Kevin Strain (President and CEO)

Paul, it's Kevin. I want to take a bit of a step back. We gave 12% sort of growth expectations in the medium term for the U.S., and we still feel really good about that. If you looked at the stop loss business, we have scale. We typically have better margins than our competitors. We've seen even outperformance, even though it's been challenging the last few quarters. We have capabilities that we've added there. As a big player, we continue to be a strong player in that business. Our employee benefits business is doing as well as it's ever done. The investments that Dan and the team have made into technology and differentiating themselves there has been really powerful.

As we move out of this phase for the dental into the growth targets that we put, we see that as being part of the tailwind to achieving that medium-term objective. If you step back, I think we've got great capabilities in the U.S. We are very dedicated to hitting that 12%. Dan has built a really good team there to deliver on that. I think scale is really important. I would also say scale on the dental side. We talked about all the challenges in dental. If you do not have scale, getting through those challenges is going to be hard even for a lot of our competitors. I think we're well positioned. I think we're in the right parts of the business there. I think we're doing the right things to drive out that growth over the medium term.

Paul Holden (Analyst)

Got it. That is all helpful. I will just stick to my two questions. Thank you.

Operator (participant)

The next question is from Lemar Persaud with Cormark Securities. Please go ahead.

Lemar Persaud (Analyst)

Thanks. Maybe just two quick ones here for me. Just first on the dental business, is that $100 million in dental earnings include these benefits from the retroactive premium payments? Or are those kind of on top of the $100 million target for 2025?

Kevin Strain (President and CEO)

Anything that generates underlying net income is part of the calculation, of course. I think the way to think about these retroactive payments, they're not a gift. They're something that is becoming part of the regular process as states look to find ways to fund these programs correctly. As I mentioned earlier, two of the last three quarters, we've had a retroactive premium. That's something that may happen periodically versus something that's unrelated to the current results.

Lemar Persaud (Analyst)

Okay. Okay. Those payments would be included in part of that $100 million bottom line?

Kevin Strain (President and CEO)

Yes. Any revenue we get would be included. Yes.

Lemar Persaud (Analyst)

Okay. Perfect. Next question on SLC here. Just kind of building on Tom's line of questioning, would I be correct in suggesting you're likely to handily exceed that CAD 235 million 2025 target based on some of the run-ratable impacts we saw for SLC in Q1? I hear you that there's some elements here, one-timers like the seed gains and catch-up fees. The growth in fee-earning AUM and strong deployments, those are sticky things. I'm just wondering if my math is correct that it's likely to be well in excess of the CAD 235 million.

Kevin Strain (President and CEO)

I think that some of the wild cards I need to think about, we've got some big fundraisings this year on Crescent, two in particular that we're working on. The timing of those closings can make a difference. It does not really make a difference long term, but it can make a difference in terms of what income hits this year. I do not know if I'm ready to sit here and say, "Yeah, it's a guarantee that we're going to blow that number away." I'll tell you, we feel confident about it. The trends are, we feel good about the momentum in the business. There are some things that are hard for me to predict that could have an influence as to where we end up at the end of the year.

Lemar Persaud (Analyst)

Thank you. That's it for me.

Operator (participant)

The next question is from Alex Scott with Barclays. Please go ahead.

Alex Scott (Analyst)

Hey. Good morning. I had one for you on MFS. Flows actually showed a little bit of progress, which was good. I think in some of your comments, you mentioned that your clients are still continuing to look at allocations and so forth. I just wanted to understand that comment and if that's indicative of anything in the pipeline you're seeing. Just trying to understand if we could maybe think about this positive momentum or flows being less negative as something that could continue, or is this more of a blip and you're still seeing a lot of activity there in terms of pressure?

Ted Maloney (CEO of MFS Investment Management)

Hi, this is Ted. I think the comments were meant to be more of a continuation of what we've seen. I think the blip was actually, we hope and we think, in Q4 where a number of redemptions were pulled into one quarter that in the current trends we've seen would have been spread across more. That is how loans happen. I think the point is that a lot of the trends that we've seen today have persisted. I think what changed in the quarter, of course, is that you had a lot of volatility that led to some retail outflows picking up. Actually, the institutional side, as you can see, was significantly less bad than Q4. The retail outflows are an industry phenomenon. Our share remains very strong. We would expect that as money comes back in, it would come back into us.

Largely speaking, flow's nearly impossible to predict quarter to quarter, but the trends that we've seen in place remain in place.

Kevin Strain (President and CEO)

I think that was Ted, your answer was a little choppy. So it's Kevin. Maybe I just say that as Ted was saying, most of the outflows in the quarter were related to the U.S. retail business where we all know what happened to equity markets in the U.S. and what typically happens is there are outflows and the industry was outflows. MFS was roughly consistent with those outflows. On the institutional side, it was much closer to flat. I think that, again, MFS has great long-term performance. They know how to run money. Their coming through is still an at-scale industry leader in that business. We're starting to see flows to fixed income and active ETFs, as I mentioned in my earlier discussion. I think that's a positive as we look forward as well.

Lemar Persaud (Analyst)

Got it. Very helpful. Maybe if I switch gears to Asia, Hong Kong sales are really strong. I was just hoping maybe you could give us some color on some of the things you're doing to drive the strong sales. Along with that, I understand there's a wide range of outcomes from tariffs. I guess maybe just high level, how sensitive do you think your sales would be in Hong Kong to a deteriorating economic environment?

Manjit Singh (President of Asia)

Yeah. Good morning, Alex. It's Manjit. As I've mentioned before in previous calls, we've made a lot of investments and have a lot of momentum in our Hong Kong business across a number of dimensions. We've invested in our agency ports. That's gone up more than 50% over the last couple of years. That's helping to drive good volumes. About 18 months ago, we also launched a new banker partnership with Dongxing. That's doing very well, in fact, ahead of our business case. We maintain a very strong position in the broker channel as well. All of those things are working for us. You marry that up with a great brand, good products, and a good client proposition. That's really driving good momentum in the business. I mean, in terms of the macro environment, obviously, I can't predict where that's going to go.

I feel very good with how the business is performing and how we're positioned. I think that will help us manage through the conditions that we see going forward.

Kevin  Morrissey (SVP and Chief Actuary)

It's Kevin, Alex. Hong Kong's also had an incredible resiliency. It is a really important market for all the life insurance wealth businesses in Asia. I think what we've done particularly well in the last two years, 12 months under Manjit's leadership, is really drive distribution through our agency force, which is growing through our new relationship with Dongxing and having good relationships with the brokers in Hong Kong. We have been seeing the industry overall has seen strong results, but we've done really well there.

Lemar Persaud (Analyst)

Thank you.

Operator (participant)

We have a follow-up question from Gabriel Dechaine with National Bank Financial. Please go ahead.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Just a quick one on SLC. Okay. What I'm hearing from the private equity industry, and I mean, we all know this at this point, but just to frame it, higher interest rates, volatile markets, not good for monetization. And some are pushing back expectations. I'm wondering how that dynamic plays into the outlook for SLC. I know it's not a private equity in the private equity industry necessarily, but you do rely on monetizing assets to make money at some point. And that generates performance fees, etc. Is there any commentary on the outlook for monetization that you believe need to be addressed?

Kevin  Morrissey (SVP and Chief Actuary)

Yeah. Gabriel, you're right. It does have a secondary impact, an important one on our private credit business. It can cut both ways. This quarter, I think you see on the slide at the bottom, net deployments. Deployments are up strongly this quarter, which is a good thing because in the funds we manage at Crescent, we start earning fees as we get the money deployed. On the flip side, if a private equity portfolio company sold and they repay the debt, that becomes money that comes back to us. We distribute it out to our LPs, which is a great thing. It does mean that assets under management can go down. We have seen less activity in the private equity world for the reasons you cite.

The good news is that means some loans that we have are outstanding longer than they might otherwise be. It can also mean that there's just less deal activity. We have less opportunities to invest new money. It can cut both ways, I guess.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

All right. I'll sneak one in on MFS. The rebalancing stuff, we hear about the rebalancing as a reason for outflows, which we're seeing that. On the institutional mandates, nearly $10 billion of inflows, that's been in the $5 billion-$6 billion range for the past number of quarters. I'm wondering if MFS's style is maybe back in vogue or back in fashion or something else.

Kevin Strain (President and CEO)

Can you hear me?

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Yeah. Now I can.

Tim Deacon (EVP and CFO)

Yeah. Yeah. That's better. Good.

Kevin Strain (President and CEO)

Okay. Okay. Thanks.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Great. Yeah. A little too much change, anything, but.

Kevin Strain (President and CEO)

Okay. All right. Yeah. I'm good. Yes. I mean, the flows are broad across the board. Kevin highlighted that our net flows are positive in fixed income, which is true across institutional and retail. That is a factor. Also, we have a very strong international equity franchise that continues to be in pretty meaningful inflows, both retail and institutional. That has been a driver, particularly of the institutional flows that you mentioned on the equity side. Yes, negative net flows always include some positive gross inflows. Those trends that are in place there, we do think that is part of why the math has led to less negative flows. We would expect that to continue over time with lots of lumpiness. Yeah.

Ted Maloney (CEO of MFS Investment Management)

Can you remind me the split of international AUM there for I don't know if this trend is going to last, but clearly there's money moving out of the U.S. market sales and going elsewhere?

Kevin Strain (President and CEO)

Yes. We can follow up with you on the precise numbers. It is a meaningful part of our business. Where it gets complicated is it is a meaningful part of our business that is global, right, which is a combination of US and international. Also, just to be clear, we are talking about the companies that we are investing in on the equity side, not the client type, right? So investing in international sort of non-U.S. global mandates. We can certainly follow up with you on the precise split.

We can take it offline, as they say. Again, have a good weekend.

Gabriel Dechaine (Managing Director and Senior Equity Analyst)

Thank you.

Operator (participant)

We have no further questions at this time. I will turn things back over to Ms. Brady for closing remarks.

Natalie Brady (SVP of 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 good day.

Operator (participant)

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