Sun Life Financial, Inc. (SLF) Q4 2022 Earnings Call Transcript

Sun Life Financial, Inc. (NYSE:SLF) Q4 2022 Earnings Conference Call February 9, 2023 10:00 AM ET

Company Participants

Yaniv Bitton – VP, Head of IR & Capital Markets

Kevin Strain – President, CEO & Director

Manjit Singh – EVP & CFO

Ingrid Johnson – President, Sun Life Asia

Daniel Fishbein – President, Sun Life U.S.

Jacques Goulet – President, Sun Life Canada

Randolph Brown – CIO, SLC Management

Kevin Morrissey – Chief Actuary & SVP

Stephen Peacher – President, SLC Management

Conference Call Participants

Meny Grauman – Scotiabank

Scott Chan – Canaccord Genuity

Gabriel Dechaine – National Bank Financial

Doug Young – Desjardins

Tom MacKinnon – BMO

Paul Holden – CIBC

Nigel D’Souza – Veritas

Operator

Good morning, and welcome to the Sun Life Financial Q4 2022 Conference Call. My name is Michelle, and I’ll be your conference operator today. [Operator Instructions] The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton.

Yaniv Bitton

Thank you, operator, and good morning, everyone. Welcome to Sun Life’s Earnings Call for the Fourth Quarter of 2022. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at Sun Life.com. We will begin today’s call with opening remarks from Kevin Strain, President and Chief Executive Officer. Following Kevin, Manjit Singh, Executive Vice President and Chief Financial Officer, will then present the financial results.

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

Thanks, Yaniv, and good morning to everybody on the call. Turning to Slide 4. Sun Life delivered strong performance during the fourth quarter, contributing to solid 2022 full year results. Our results demonstrate the resilience of our diversified business model and the commitment of our people to deliver strong earnings and continued growth in the midst of challenging environment while meeting our commitments to clients and delivering on our purpose.

We’ve made tremendous progress on our business strategy by driving positive client impact for our 85 million clients around the world. We achieve strong underlying earnings this quarter of $990 million Canadian representing 10% growth over prior year demonstrating the resilience of our business mix. Our growth was driven by strong results from our protection and help businesses. Sun Life U.S. us had a strong fourth quarter underlying earnings as a result of solid underwriting performance in health and risk solutions, significant moderation of COVID related impacts and contributions from DentaQuest.

In Asia, we saw a breakthrough in earnings profitability in Vietnam driven by the addition of a scale in bank insurance and in agency and we saw higher margins in our international high net worth business. Strong results from our protection and health business were partially offset by lower income and increased outflows from our wealth and asset management businesses, largely reflecting declines in global equity markets. Underlying ROE for the quarter up 15.7% continues to trend towards our medium term objective of 16% plus, reflecting our disciplined capital management and growing emphasis on capital Life businesses, and our LICAT ratios at SLF remain solid at 130% for the quarter.

Turning to slide 5, our full year 2022 results were driven by similar factors as seen during the fourth quarter. Underlying net income increased 4% to $3.7 billion supported by growth in our health and protection businesses. Underlying ROE for the year was 15.1% was also strong. Over the past year, we increased our quarterly dividend by 31%, following the lifting of restrictions in November of 2021.

Turning to slide 6. This quarter, we delivered on several key business initiatives that help drive forward our client impact strategy. The strengthening of our distribution capabilities in growth markets has been a priority for Sun Life in 2022. In Sun Life Asia, we remain focused on building quality distribution channels. We realized a step change in our bank insurance distribution over the last 12 months, driven by new marquee relationships and executing on our existing partnerships.

Last month we announced our first exclusive bank insurance partnership in Hong Kong with Dah Sing’s bank under the 15 year agreement Sun Life will be the exclusive provider of life insurance solutions to Dah Sing’s retail banking customers with distribution of Sun Life products expected to start this summer. This rounds out our distribution capabilities in Hong Kong and positions us well to compete. With the addition of this bank insurance partnership in Hong Kong, we now have more than 20 quality bank insurance partnerships in seven markets across Asia. Our history of execution in Asia has proven that strong bank insurance distribution, coupled with high quality advisor channels provides a critical platform for growth.

One example of this is how we’re building our business in Vietnam, executing on transformational bank insurance partnerships, with a focus on providing high quality insurance and wealth products and services to fit our client’s needs. We are now one of the fastest growing life insurance players in Vietnam. We’ve improved our market position for insurance sales from 15 position in the full year 2020 to six position in 2022.

At SLC management, we also recently closed our acquisition of a majority stake in advisor asset management. Advisor asset management or AAM adds distribution capabilities in the U.S. High Net Worth retail market, one of the fastest growing distribution channels for alternative assets. We’re excited to welcome AMM, the AAM team to our SLC team.

We’re increasingly delivering positive client impact by elevating our focus on health, helping clients access health care and coverage and the coverage they need. In the U.S., DentaQuest continues to expand its dental business, advancing our goal to increase access to oral health care in underserved communities. In Q4, DentaQuest, expanded its advantage Dental Plus care practices, with four new offices in Florida. These practices went from startup to it add capacity in 90 days, which demonstrates the need for these services. DentaQuest also had a strong quarter for contracts awarded, including two new dental managed care contracts from a multi state health plan provider.

The two newest contract expand DentaQuest partnership with the health plan to 10 states. That’s a question unique capabilities continue to contribute to our ability to win and retain state business while also driving higher margins. Additionally, the COVID-19 pandemic has exasperated the mental health crisis in Canada. We know many people are at a breaking point and we need to offer more resources and more access to tackle this crisis. We know the workplace is an important place to address these concerns. And we’re doing our part in Canada by providing clients with better access to mental health solutions. We’re also doing our part in our communities.

And last month we announced an investment to support mental health programs for at risk marginalized youth across Canada, continuing to build capabilities that will expand access to care, will support Canadians with early prevention and with faster recovery. We continue to make great strides in our digital journey. Tied to our commitment of increasing financial security we continue to work hard to build the capabilities such that our clients can access our spectrum advisory options through a frictionless digital experience.

Sun Life Canada has created more than 65,000 financial roadmaps for Canadian clients in 2022 using our Sun Life One Plan digital tool. Sun Life One Plan contributes to our goal for all Canadians to have a financial plan.

Finally, we continue to be recognized for our progress in sustainability and our inclusive culture. Sun Life was recognized by Corporate Knight as being among the global 100 most sustainable corporations in the world for the 14th consecutive year. And this year, we were the top ranked insurance company globally.

Additionally, Sun Life received many employee awards in 2022, including being certified as a great place to work in several of our markets. This is especially gratifying because it’s the result of direct feedback from our employees. This is recognition of our focus on ensuring we have an environment where diversity is championed in addition to offering resources and flexibility to support mental, physical and professional wellbeing.

Before turning to Manjit to detail our Q4 financial results, I’d like to share a few final thoughts. First, I’m excited to welcome Tom Murphy, our new Chief Risk Officer to the Sun Life executive team. Some of you will know Tom from his time with FLC management, where he headed up our fixed income and institutional business. Tom brings a global depth of knowledge and experience particularly in asset management and the pension space which will be a tremendous benefit for all of us. I’d also like to recognize Colin Frame. Many of you on the phone will know him from his time as the Sun Life CFO and then as our chief risk officer.

Colin will retire on May 1 after an illustrious 20 year career with Sun Life. He has played a significant role in our company’s growth over the past two decades. On behalf of everyone at Sun Life, I want to thank Colin for his service to Sun Life and wish him well in his retirement.

And lastly, I’d like to share a few thoughts on the year ahead. While we expect the environment to remain challenging, we are optimistic about the outlook. Based on recent direction of travel for inflation in North America we’re seeing most economists forecasting a plateau of interest rates in the back half of 2023 with some soaring reductions in interest rates in 2024. We expect some volatility and rates will persist. But this will likely be within a tighter range.

While inflation looks to be moderating we continue to watch the environment including geopolitical uncertainty, additional socks the energy supply, the reopening of markets in Asia, and COVID-19. We continue to feel prepared as a result of a resilient client impact strategy supported by our diversifying and capital Life business mix. Recent investments across growing spaces and health, asset management and Asia and our sustained commitment to delivering on our purpose to help clients achieve lifetime financial security and live healthier lives will all support us next year.

With that I will now turn the call over to Manjit who will walk us through the fourth quarter financial results.

Manjit Singh

Thank you, Kevin. And good morning, everyone. Let’s begin on slide 8, which provides an overview of our Q4 results. Sun Life had a strong finish to the year with record underlying earnings in the fourth quarter, reflecting the strength of our businesses and the benefits of our diversified mix. Underlying net income of 990 million and underlying earnings per share of $1.69 were up 10% from the prior year. Strong results and protection health businesses were underpinned by business growth, the contribution from the DentaQuest acquisition, higher margins in the U.S. and Canada and moderating COVID related impacts.

This was partially offset by lower wealth and asset management results, which were impacted by global equity market declines. Reported net income for the quarter was 951 million down 12% from the prior year. The results for this quarter include market related impacts and DentaQuest integration expenses. Our balance sheet and capital position remains strong, as reflected by an underlying return on equity of 15.7% for the quarter, a 5% increase in book value per share over the prior year, a strong capital position with a lockout ratio of 130% SLF up 1% from Q3, and 130 basis points improvement in the leverage ratio of 26.4% last quarter to 25.1%.

Let’s turn to our business group performance starting on slide 10, with MFS. MFS underlying net income of U.S. 202 million was down from the prior year, driven by lower average net assets largely reflecting declines in global equity markets. Reported net income of U.S. 223 million was down 5% reflecting impacts and underlying net income, partially offset by fair value changes on share based payment awards. MFS generated a strong pretax net operating margin of 40%. AUM of U.S. 548 billion was up 8% from Q3, largely reflecting higher equity markets partially offset by net outflows. Retail net outflows of U.S. 8.3 billion in the quarter are impacted by industry wide redemptions, as our investors remain cautious in an uncertain macroeconomic environment. Institutional net outflows were U.S. 3.6 billion in the quarter.

Turning to slide 11. SLC Management delivered underlying net income of 38 million and reported net income of 19 million. We are pleased with the attractive business fundamentals at SLC Management. This includes good momentum and capital raising across all asset classes, including 3 billion in the current quarter, as well as 22% growth in fee related earnings, reflecting the deployment of capital into fee Y earning AUM. Total AUM of 210 billion were 14% year-over-year. This includes 21 billion that has not yet earning fees. Once invested these assets are expected to generate an annualized fee revenue of more than 180 million.

Turning to slide 12. Canada’s underlying net income of 324 million was up 22% from the prior year, driven by strong insurance sales, improved disability performances on life health and higher investment gains. This was partially offset by lower fee income and wealth management businesses. Reported net income of 360 million was up slightly from the prior year. Total protection and health sales were up in the quarter reflecting an increase in large case sales in Sun Life health. On the wealth side retail sales were impacted by the market environment. Group retirement sales increased year-over-year reflecting our differentiated products and services as well as the strength of our client relationships.

Turning to slide 13, U.S. underlying net income of U.S. 177 million was up 121 million from the prior year, reported an income of us 81 million was up 13 million. The results were driven by strong performance across all businesses, including the contribution of DentaQuest. Good benefit results were driven by a 16% increase in expected profit and a significant moderation of COVID related mortality and disability impacts. Business fundamentals remain strong, including good client persistency, strong premium and free growth and solid stop loss underwriting margins. The group benefits after tax profit margin increased at 8.4%. Sales in the U.S. were up 11% year-over-year.

We saw good momentum and employee benefits sales reflecting our investments in technology partnerships and new digital capabilities. Stop loss sales were lower reflect In a more competitive pricing environment. Despite the changing competitive dynamic, our focus remains the same, provide value to our clients and maintain good pricing discipline. We’re very pleased with the DentaQuest results. We are on track with our integration milestones and are confident that we will achieve our synergy targets. DentaQuest delivered strong sales for the year adding approximately 3 million new members in ‘22 20 bringing the total number of members just 36 million.

Slide 14 outlines Asia’s results for the quarter. Underlying net income of 152 million was up 16% year-over-year on a constant currency basis. The results are driven by insurance business growth and moderating COVID related experience. Wealth and fee related earnings were impacted by lower equity markets in Asia. Reported net income of 98 million was down from the prior year, largely driven by the gain from the IPO of our Indian Asset Management joint venture and October of last year, and market related impacts. Asia generate double digit insurance sales growth in most markets. We continue to gain momentum reflecting the benefits of our continued focus on client experience, rollout of new products and expanded digital capabilities, as well as the easing of pandemic restrictions. In corporate, underlying net loss of 39 million reflects a higher effective tax rate compared to the prior year, while reported net income was in line with the prior year.

Turning to slide 15. We outlined the progress on our medium term financial objectives. Despite the challenging operating environment 2022 our resilient set of businesses delivered a 9% underlying EPS growth over the five year period. Underlying ROE over the five year period was 14.7% and 15.1% for 2022 reflecting the shift in our mix to capital light businesses, and the payout ratio within our target range of 40% to 50%. We continue to maintain a strong balance sheet and capital position which provides a port to execute on strategic priorities and as a key strength to manage through an uncertain environment.

Looking ahead to 2023 we remain optimistic about the fundamentals across each of our businesses. While we expect the operating environment to remain challenging, we are confident that our leading business positions, focus on client outcomes, discipline, capital expense management, and strong talent will help to drive continued growth. And of course, this will be our final quarter under the current reporting framework as we transition to IFRS 17 in Q1, 2023. As we’ve noted before, IFRS 17 does not impact our core business drives or the fundamental economics of our businesses. It will however, impact the timing and presentation of our financial results. Based on our parallel runs for the first three quarters we have provided some updated disclosures this quarter.

First, we updated the estimated earnings impact for the 2022 restated comparative year from a decrease of mid single digits to a decrease of high single digits. This is largely driven by higher investment activity gains for the year. Our investment team has a proven track record of identifying and executing on opportunities to enhance the spread for investment followed in volatile market environments like we saw for most of 2022.

The present value of the higher spread is recognized immediately into earnings under IFRS 4 but we will be recognized over time as we transition to IFRS 17. While the economics and earnings benefit from the high yield is the same over time, it results in a higher IFRS 4 versus 17 difference transition. The second update is that we expect a high single digit increase in the likelihood ratio on transition to IFRS 17. This is higher than our estimates in May of last year, reflecting updates to our cash flow projections under the new life guidelines, as well as refinements or estimates as you complete our quarterly IFRS 17 parallel reporting. We’re currently in the process of finalizing our dual reporting for the 2022 comparative year and look forward to sharing additional details in May with you with the reporting of our first quarter results.

With that I’ll turn the call back to Yaniv for Q&A.

Yaniv Bitton

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

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Meny Grauman with Scotiabank. Your line is open.

Meny Grauman

Hi, good morning. Manjit you concluded your remarks by talking about expecting the operating environment to remain challenging in ‘23. I was hoping you could go into more detail. When I look at it I see some improvement in equity markets that started the year, the reopening in Asia. So, when I look at it, it seems like there’s more reason to be optimistic for the outlook. And so I’m wondering if you could just go into where are the causes for concern as you see them in 2023?

Manjit Singh

Thanks for your question, Meny. I think you’re right. I think we are seeing some signs of improvement. But I don’t think we’re ready to declare victory yet in terms of the overall operating environment. We do sort of see some, some some some potential for things to move back and forth over time. But more importantly, I think, for us, we are very pleased with a diversified set of our businesses and our leadership positions within those businesses. And we feel that as we’ve shown over the last couple of years that we can manage through pretty well through a different, very different types of environments.

Kevin Strain

Meny it’s Kevin Strain. The equity markets year-over-year starting off still down, although they’re up a little bit at the start of the year. And that puts pressure on fee income, which impacts MFS, impacts SLGI, impacts our GRS and pension business in Asia, but also a lot of our universal life business in Asia is tied to fee income as well. So it’s a bit of a headwind. But we are seeing the start of the year look good. I sort of addressed that in my comments as well. We will see how the year performs. But it’s really a factor on the fee income from our equity businesses.

Meny Grauman

Thanks for that, Kevin. And if I could just follow up. You gave an interview about a month ago, talking about M&A opportunities in Asia and the potential opportunities created by the reopening that maybe some deal competitors potentially would be distracted. So I’m wondering if you could provide a little bit more color on those views in terms of how you see opportunities for M&A in Asia in 23? And maybe more specifically, what specific areas are you looking at in Asia for deploying capital in 23?

Kevin Strain

Yes, thanks, Meny. Well post the interview we did the bank insurance deal in Hong Kong, and we’re quite excited about that. That really rounds out our capabilities in Hong Kong. It gives us bank assurance alongside of our agency distribution, we have brokerage there and we have the second largest pension business by flows. So we’re quite happy with where we ended in Hong Kong with that Hong Kong bank insurance deal. As you know, we’ve done a bank insurance deal of a fairly sizable one in Vietnam that I talked about with ACB bank in my remarks and that built on our position with BP. We redid our related our agreement with Grappa which is our CBC bank in the Philippines.

So we were quite active in Asia and have been quite active. I’m pretty pleased with where we are now if you look at our capabilities, cross Asia, building to do multi channel distribution. With the addition of bank insurance in Hong Kong, we now have bank insurance in every market except for Singapore. So we’re well suited in Asia. I think that that piece of the puzzle of adding bank insurance in Hong Kong was an important step for us. You’re right to note that and Ingrid may want to talk with us a little bit more that the border is opening. And we see that as a good thing for Hong Kong and the Hong Kong economy, which would be a good thing for sales in the Hong Kong business. Now that will take a little while. It just opened in January. And those bales take a little while to come through. And there’s still working through the getting the momentum and sort of that travel back and forth across the border. I don’t know Ingrid if you wanted to add anything.

Ingrid Johnson

Again captured as well. Kevin, just Additionally, in Indonesia of the expanding our bank insurance deal with the [Indiscernible] is very important for us. Definitely optimistic about the potential as well as the underlying momentum that we’re seeing in the insurance sales, which were almost 30% in all of our other markets except Hong Kong and China. So we are well placed but clearly with some of the headwinds Kevin described.

Operator

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

Scott Chan

So identify a second quarter contribution. I remember when you announced the acquisition, you talked about robust growth and kind of cited a 14% revenue CAGR from 2018 to what was probably near 2021 to 2.7 billion. If I look in the supplemental on your gross premiums on dental, it seems to be tracking in line with 2021 in terms of sales growth. Am I reading that right? Or is it a more stable growth that you witnessed with that platform in 2022?

Daniel Fishbein

Well, thanks for the question. This is Dan Fishbein. One thing to point out is that we are reporting commercial dental, which includes the legacy Sun Life, commercial business and DentaQuest in that segment. So it’s important to look at both pieces. So first of all, commenting on the commercial, we’ve actually had really great sales growth in the past year on commercial dental that was up about 50%. It’s obviously still very early. We’ve only reported on seven months of DentaQuest results but their sales results have continued to be quite strong. They added 3 million government programs members last year, for example, we mentioned, Kevin mentioned in his opening remarks, some significant sales in the fourth quarter. And that momentum has actually continued in January. But to specifically answer your question overall, both their sales and revenue growth have been roughly in line with the past trend. The sales in the government programs, business tends to be quite lumpy. You get big sales infrequently. So a seven month period is a little bit hard to establish a trend on but so far, so good.

Scott Chan

And when I look forward, Dan then I’m looking at growth outside of the revenue synergies. How do we kind of maybe track that? Is it more of like the industry trend on like government program growth? Or is it more on DentaQuest? Maybe taking market share and expanding into certain states like you did in Florida this last year.

Daniel Fishbein

Yes. I would suggest you look at our growth specifically. But there’s lots of good tailwinds going on there. There’s a very robust pipeline that DentaQuest is working on right now. I think it’s we view it as just about the strongest that they’ve ever had. There are states continuing to move their programs from regular fee for service to manage care. And we’re certainly participating in all of those RFPs. There are health plans, as we noted in the fourth quarter, who continue to outsource their dental business in the Medicaid and Medicare programs to us. And we also have quite a bit of momentum on the commercial side. So we’re optimistic about the growth trajectory here. The pipeline is very strong.

Operator

Our next question comes from Gabriel Dechaine with National Bank Financial. Your line is open.

Gabriel Dechaine

I got a couple of questions. First here. I know, the group results have been both in Canada and the U.S. really strong. And I’m wondering if that’s the claims costs have been inflated all because of interest rates. I guess my question is, despite the impact of interest rates are still generating these strong results, or has that not been a material thing?

Kevin Strain

We let Dan, maybe start in Jacque may want to jump in on the Canadian experience.

Daniel Fishbein

Yes. The group results are strong. I think, as you noted, improving morbidity and mortality, of course, are the primary reasons for that and kind of overwhelm all other factors. In the U.S. our mortality moderated significantly, still elevated, but moderated significantly, throughout the year, and especially in certainly in the fourth quarter. Disability morbidity has improved and stabilize. You are right there is a little bit of an impact around interest rates on long term disability liabilities, but it’s relatively small compared to the morbidity and mortality incidents.

Jacques Goulet

In the case of, can you hear me in the case of Canada, and then you would know that there’s essentially three things we’re looking at here. And a few years ago, we started re-pricing the business in line with the higher volume of claims that we were seeing and then Martin disability group sign. And that’s obviously now contributing nicely to our results.

The other two things that we watch very closely are the volume of claims. This past quarter, I would say those were a little bit better than we are expecting but not materially. And the other area is the duration of the claims and there we have better experience than expected. On that one Gabriel I would be a little bit careful because as we’ve said in the past, one of the drivers experience in duration is access to care. And it’s not clear in my mind that this has changed materially in Canada. We still see some challenges in the healthcare system. So we had a great quarter. We’re pleased with that, of course. But you can imagine, this is an area that we’ve always continued to watch very closely. And we’ll do that. And one of the levers we look at very carefully is the pricing. We think we’re pricing in the right place.

Gabriel Dechaine

My second question is on the real estate experience losses. I get why it’s happening. Just wondering what sectors, what geographies may have yielded that results? And two, could we be in another phase, like the one we saw on most of the 2020, where real estate experience losses were, we had them for like three or four quarters in a row.

Randolph Brown

Hi, Gabriel. It’s Randy Brown, thank you for the question. So let’s take a step back for a moment on commercial real estate. We’ve seen very strong growth in the sector over the last couple of years broadly. Although you did see within that weak weakness in office and retail because of the whole shift in office because it was exacerbated by the pandemic. With that said, the total return of our portfolio in Q4 was positive. So what you’re seeing come through is the deviation relative to the long term expectation of what we would earn. Right. And if so it within that, though, very, the sectors broadly performed in line.

So we weren’t seeing a major deviation between the various sub sectors. So that’d be one, one point. The second point would be as you think about real estate as we go forward, yes, we do expect some cap rate decompression given the speed of risk free rates increasing. And we’re seeing that. Now in some sectors, it’s been offset by fairly robust rental inflation, think industrial multifamily, in others weakness in rent growth, think office. With that said we had talked about a pretty major repositioning of our real estate portfolio over the last number of years anticipating a downturn and so to give you an example, our office portfolio went from 39% to 24% over the last, from basically the beginning of 2019, to the end of ‘22. The majority of that coming early in that transition. At the same time, our industrial portfolio more than doubled. So we are positioned well within the real estate portfolio for what we believe may be coming.

Gabriel Dechaine

And just, you praise a quarter of the portfolio a quarter, like you don’t do it all in one shot, right.

Randolph Brown

Right. It’s a rolling appraisal. So everything gets externally appraised periodically and then we will reappraise using those benchmarks we’ll use internal appraisals on everything every quarter.

Operator

Thank you. Our next question comes from Doug Young with Desjardins. Your line is open.

Doug Young

Good morning, maybe this is for Dan DentaQuest. I mean, if I look at the dental operation, and I know it’s got the legacy business in there, but there was a loss of 22 million if we back out the acquisition related costs in the U.S. which I assume is all related to DentaQuest. And I can triangulate back to 33 million of earnings. And I know there’s going to be a little bit in there for again, the legacy business. Just curious is the math correct. And then I’ve got a follow up on the U.S.

Daniel Fishbein

Yes, Doug, I think that is a good way of looking at. I think you’re thinking about that the right way. The integration expense you’re seeing there is virtually all, is all related to dental class. And I can share in the quarter that the legacy commercial Sun Life business generated about $3 million in after tax underlying earnings. So the balance would be from DentaQuest.

Doug Young

And then just looking at the U.S. group businesses as a whole. You’ve expressed a margin target of around 7% for the quarter, I know, last 12 months was 8.4%. But for the quarter, it was 10.4%. I guess my question, Dan, what causes the margin to migrate down to 7%? Or is there a need to push this 7% target higher? And you see more comfort in the outlook for that group business over the coming years?

Daniel Fishbein

Yes, it’s a great question. Of course, we’ve just went back over the 7% threshold on the trailing 12 month basis, because of the primarily because of the very adverse COVID mortality experienced earlier in 2022. So we’ve just gotten above that metric, again, we’re obviously pleased to be there. And we don’t anticipate right now or return to the COVID mortality that we saw in the fourth quarter of 2021, or the first quarter of 2022. But having just hit the threshold, again, I’m not sure we’re ready yet to raise the threshold at this point.

Doug Young

And then just when you when I look at that business stop loss sales were down, it seems from the prepared remarks, you’re seeing a net pick up in competition. I mean, we’ve seen this trends happen in the past and margins being negatively impacted and stop loss. And I think that’s where you’re punching above your weight in the margin side. Are you comfortable that the competition isn’t getting irrational in that stop loss business, anything to be concerned there?

Daniel Fishbein

Yes. I think historically, and we’ve said this before, stop loss has always been a cyclical business. Margins improve competitors decide they want to take some share, they get a little less disciplined, a little more aggressive. We’ve had a history of being a very disciplined underwriter and price of the business. And you see that in our experience. We actually anticipated this. Our sales were down a bit in the fourth quarter versus the prior year quarter.

But we actually plan for that. Now a little bit of that is we had a big block of business that came in the fourth quarter of 2021. And we knew that that would not recur. So we actually our sales for the year were a little bit above our expectations which is good. But we will not break our discipline around our view of trend and pricing in order to acquire market share. There are some competitors who are probably doing that right now. So the market is getting a little bit more competitive. But we think, as you’ve noted, we can continue to outperform the market on that basis.

Kevin Strain

It’s Kevin Strain we’re also finding new ways to compete for business by adding things like Pinnacle care on top of the stop loss business, which helps to take the conversation away from being fully priced to being ways of adding value. And because we’re one of the larger players, we have unique capabilities to do that sort of thing.

Operator

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

Tom MacKinnon

Question with respect to Asia. If I look at the impact of new business, that was positive one in the quarter now, we’ve seen that similar positive one, the fourth quarter of 2021. But historically, this has always been negative. And the sales were up nicely international, or they’re flat year-over-year in the international hubs and up getting about 10% or 11% in the local markets. So just curious as to what’s driving this in this quarter? Is it more profitable new business? Is it a better mix? How sustainable would that be? Granted, there is going to be an accounting change as to how this stuff is going to be booked. So any color there and then I have a follow up. Thanks.

Ingrid Johnson

Thanks very much. It’s Ingrid Johnson here. Exactly right. So this quarter, we were very pleased with the new business going so particularly in Vietnam, and international, where it’s been a focus to improve product economics and margins relating to that. So that we are very pleased about and then you are seeing also just some changes if we look versus the prior on just the absence of some of the benefits that we would have had in in prior we had reversed of mortality and some investment related gains.

Daniel Fishbein

I think new business strains specifically there’s a combination of things. Ingrid’s approach the selective underwriting for the international high net worth has made that business more profitable. And then as we’ve added scale, that also helps in terms of business strain. So adding the bank insurance agreements and focusing on building an agency helps with the new business strain item that you were talking about. And, Tom, as you note, it, of course, goes away under IFRS 17. But we’re happy to see a positive result from the selective underwriting and the addition of scale.

Tom MacKinnon

Okay, that’s great. And then the follow up here is just curious as to what’s driving the increase in the LICAT upon transition. If I look back our head said, the movement accounting doesn’t this accounting change is not going to drive capital, I think they had said for the industry as a whole, the movement to IFRS 17 would be capital neutral. So just curious as to if you can put your now high single digit, I think it is impact upon transition to your LICAT ratio in that context. Is there what is driving your increase? And any commentary you can share with what I said about the industry would be helpful as well. Thanks.

Kevin Morrissey

Sure, thanks for that question, Tom. It’s Kevin Morrissey. So yes, we are expecting a favorable high single digit LICAT racial increase at January 1 of 2023, as part of the transition to IFRS 17. You’re right to point out that RC did set a target for industry neutrality recognizing that there will be pluses and minuses, some companies will be more favorable, some less. So that was an overall. What’s driving our specific increase I think there’s a lot of moving pieces, Tom.

As you know, LICAT ratio is quite complex and is moving pieces cross the numerator and the denominator. But I think that we can highlight probably the one driving factor that accounts for Sun Life’s increase is the change to the scalar. So as the scalar on the base solvency buffer reduces from 1.05 to 1. And this accounts for approximately 7 point increase at transition for Sun Life.

Maybe the one final thought I’ll leave with your question with regard to color on the industry. I think that one of the challenges around the final calibration we had is the changing market conditions, and the volatility of LICAT under IFRS 17 as it responds to changes in market conditions, especially interest rates. And so I think with that kind of moving bald throughout the year of 2022, it’s quite difficult to set that exact point. And I think that where we landed with interest rates higher, that was probably a bit overall favorable for the industry.

Tom MacKinnon

Okay, thanks for that color and your billion dollar I think it’s your capital generation annually after investing in the business and paying your dividend is still a billion dollars annually. Is there any color you can share with respect on that?

Kevin Morrissey

Yes, Tom it’s Kevin again. That’s right. We’re seeing the IFRS 17 outlook largely the same in terms of capital generation.

Operator

Thank you. Our next question comes from Paul Holden with CIBC. Your line is open.

Paul Holden

Thank you want to continue with the same topic. It’s an important one given the change in LICAT ratio. And sort of in the context of given what you were just saying regarding increased volatility under IFRS 17. Does all of the additional capital margin become the boilable capital? Or will you have a bias to maintaining more of a LICAT margin because of that increased volatility under IFRS 17?

Kevin Morrissey

Thanks for the question, Paul. It’s Kevin Morrissey. I will answer the first part around the volatility and then I’ll pass it to Manjit around the deployability of that. So when we’re thinking about the LICAT volatility, the comments I made on volatility is largely with regard to interest rates. And I did mention the changing interest rate environment, volatility of interest rates that we saw throughout 2022. Where we are now with interest rates we see our interest sensitivity for LICAT to be largely in line with our reported sensitivities now.

However, one of the things to note that as the sensitivities can change quite a bit with changing market conditions. So for example, with interest rates being lower or higher, those sensitivities will change more rapidly than they do under IFRS 4. And a lot of that is driven by the IFRS 17 market consistent cost of guarantees in the new accounting and actuarial basis. So that is something that we’re aware of that we’re going to be monitoring and we’re ready to manage, but it is something we do expect will create some inherent increase in underlying volume.

Manjit Singh

And then just on the second question Paul, it’s Manjit. Overall the higher capital will lead to higher whole cash and deployable capital. But I would just sort of note two considerations. The first is that some of the LICAT increase that we’re getting is related to businesses outside of Canada. And for those businesses are continued to be subject to their local regulatory requirements. So there can be some timing differences between when that when we can bring that cash bounce back up to Sun Life. And the second factor to consider is obviously, as we’ve talked about, and Kevin’s remarks in mind, we also look at the overall operating environment and kind of base our capital levels in that environment. And so those would be two additional considerations.

Paul Holden

Got it. Thanks for that. And then second question is with respect to SLC, another year of strong sales. There has been some industry news regarding certain alternative managers closing funds for redemptions, maybe some sales headwinds, because of higher rates and concerns regarding valuation and private asset classes. So I think it’d be helpful just given an update on what you’re currently sitting and expecting for SLC flows in 2023. Thank you.

Stephen Peacher

Thanks, Paul. It’s Steve Peacher . I will comment on that. Just quickly looking back at 2022, obviously a volatile market environment. But we felt really good about the capital that we were able to raise in the past year. I think total capital raised was $18 billion for the year, AUM depending on whether you look at fee earning AUM or total AUM was up double digits, that flows over 20 billion for the year. So when I look back at 2022, despite a challenging environment for institutional investors it’s a good capital raising environment for us.

We certainly see some pressures in the institutional market looking forward. Because if you’re making decisions that are large pension funds insurance company, the volatility of the markets makes decision making harder. The other thing is that we have something called the denominator effect. And so as public markets have traded off more dramatically than private markets, the weighting in a portfolio to private markets increases. And so when a chief investment officers think about allocating the next dollar, and they see their alternative weightings are higher, they may be a little bit less prone to allocate there. And so that created some headwinds. In the fourth quarter.

You saw that our fundraising was positive in the fourth quarter, but lower than it had been earlier in the year. I think that pressure is going to kind of continue a bit, continue in the first half of this year. Having said that, it’s against the backdrop, both institutionally and now on the retail front of the trend toward alternative asset classes. So you’ll have some fluctuation in trends as the economy moves as interest rates move, but the basic trend is toward higher allocations. And we don’t see that stopping and we think it’s a multiyear trend.

Operator

Thank you. Our next question comes from Nigel D’Souza with Veritas. Your line is open.

Nigel D’Souza

Thank you. Good morning, I wanted to go back to SLC Management. And when I look at the revenue line item, that’s up material a quarter-over-quarter looks like that’s related to question carried interest. And there’s a corresponding increase in expenses. Just wondering was there anything that particularly drove a bit more lumpiness this quarter for that item, because there’s a bigger divergence between total revenue and fee related revenue and how we should think about that going forward.

Kevin Strain

Thanks for the question. The way I would I really think given our disclosures now, which I think we improve last year and expanded, really, if you want to look at the core trends in the business, I think you should look at management fees. I know in the supplement, it’s the revenues are on page 87 thing in the supplement and management if you just like isolate management fee revenue for the quarter, it was 234 million up from 204 million last year, and for the full year was 862 million up from 755 or about 14% increase. And those are core management fees for managing assets under management and those revenues are up because AUM is up.

If you look at in core earnings measure that we look at it and also you look at across the industry as fee related earnings. And fee related earnings for the quarter were 73 million, and that was up 22% from the fourth quarter of last year. And for the full year, fee related earnings were up 20%. So that’s really I think the way to look at the core business. In terms of performance fees, we don’t have a lot of performance fees yet coming through those actually, I think are recorded below underlying income and the reported net income over the coming years, you will start to see I think more performance fees impact results.

Nigel D’Souza

That’s helpful. There’s like IFRS 17, I believe, Manjit mentioned that the impact was on investment activity gains running lower and the benefit of the spreads being recognized over a longer period of time. Just wondering if you could expand on that. What’s the spread benefit you recognize over the duration of that underlying asset and reduce size, the expected decrease in the run rate of investment activity? Would it be 20%, 30% 40% lower IFRS 17?

Manjit Singh

So Nigel, it’s Manjit. So yes, so under IFRS 4 when we trade up in our investment portfolio, that excess spread, as you know is present valued into our earnings under IFRS 4 you get the same excess spread. So economically and from an earnings standpoint, over time, the benefits will be the same, but that spread now instead of being present value into earnings in the quarter that you undertake the activity will come in over time over the duration of the assets. So that would be really a function of the duration of the assets that we traded up into.

Nigel D’Souza

Okay, so no sizing there. But just to circle up on guidance out earlier. I think you mentioned previously, that you expect underlying net income of IFRS 17 2023 to be higher than underlying income and Iris IFRS 4 2022. Is that still the guidance that you expect for this year?

Kevin Strain

Well, I think what you have to do, Nigel, is that we just updated our impact from going from IFRS 4 to IFRS 17 to be high single digits. And then if you want to take a look at what happens in 2023, then you have to factor in the current operating environment that we’re in and take account of how that would impact all of all of our businesses. And I will say as we said in May that two thirds of our businesses are not impacted by IFRS 17. So business like MFS, SLC group businesses, you could kind of just look at what you would normally expect to come out of those businesses in this kind of environment.

Operator

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

Kevin Strain

Well, thank you, operator, and thank you everyone for the great questions. Before we close today’s call I would like to take a moment to thank our employees for their dedication, resilience and persistence over the course of the year. The strength of our people and culture combined with our focus on execution has been instrumental in achieving great progress on our strategy in 2022. A big thank you from me and the executive team to all of our people. Thanks, operator.

Yaniv Bitton

Thank you, Kevin. 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.