Sun Life Financial Inc (SLF) Q1 2021 Earnings Call Transcript

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Sun Life Financial Inc (SLF 0.54%)
Q1 2021 Earnings Call
May 6, 2021, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen. My name is Adam, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Sun Life Financial Q1 2021 Financial Results Conference Call. [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 -- Vice-President, Head of Investor Relations and Capital Markets

Thank you, Adam, and good morning, everyone. Welcome to Sun Life's earnings call for the first quarter of 2021. 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 presentation with an overview of the first quarter results by Dean Connor, Chief Executive Officer of Sun Life. Following Dean's remarks, Manjit Singh, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter.

After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions this morning. Turning to Slide 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 and accurate by subsequent events.

And with that, I'll now turn things over to Dean.

Dean A. Connor -- Chief Executive Officer, Sun Life

Thanks, Yaniv, and good morning, everyone. Let me start by saying we are thinking about our friends, colleagues, clients and their families in India as the country faces this most extraordinary wave of infections. While our India employees have been working from home since the start of the pandemic, we know that this has been a very difficult time for all of them. We're working with our local teams and health officials to provide additional care and support for our people. We made a donation to India Red Cross and supporting local charities to help vulnerable people with some of the basics, such as groceries. More broadly, while we're not on the other side of this pandemic yet, there is every reason to be optimistic as the rollout of vaccines builds momentum around the world.

Turning to Slide four. Reported net income of $937 million for the first quarter was up significantly over the prior year on favorable market-related impacts. Underlying net income grew by 10% to $850 million and underlying earnings per share grew 11% over the first quarter of last year. We generated a strong underlying return on equity of 15.3% in the quarter. Our capital and cash positions continue to remain healthy, and along with a low financial leverage ratio of 22.7% provide flexibility and opportunities for capital deployment. I want to step back for a moment on the quarter's results and talk about something that has been a longtime priority for Sun Life and that is sustainability.

Our approach to sustainability focuses on what we know best, financial security, healthier lives and sustainable investing, and we're embedding that into our business. For example, in February, we announced the creation of 34 affordable housing units as part of a new 300-plus unit apartment building we're finishing in the Regent Park, neighborhood of Toronto in partnership with Daniels Group in the city of Toronto, these 34 apartments will be leased at roughly half the going market rents through a program that helps homeless or inadequately house single mothers to achieve lasting economic self-sufficiency.

And if you own one of our Sun Life participating whole life policies, you'll be glad to know that your par fund owns a significant share of this new building. In March, we set a goal of making an additional $20 billion in new sustainable investments over the next five years across our general account and third-party investments, and that's in addition to the $60 billion of existing sustainable investments. And starting this year, business operations around the world for Sun Life and MFS will be carbon neutral. You'll be hearing more from us on how Sun Life is making a difference on sustainability for our clients, our employees, our communities and future generations.

Coming back to the quarter's financial results, wealth sales and asset management gross flows were up 10%, driven by strong gross sales at SLC management and higher wealth sales in Asia over the first quarter last year. We ended the quarter with $1.3 trillion in assets under management, up 26% over prior year. MFS continued to deliver strong long-term investment performance with 97%, 84% and 95% of MFS' U.S. retail mutual fund assets ranked in the top half of their Morningstar categories based on 10-, five- and three-year performance, respectively. Individual insurance sales grew 12% over prior year, with 27% growth in Canada and 12% growth in Asia on a constant currency basis.

Total insurance sales were down 6% compared to last year as our group business in Canada continued to see fewer large cases coming to the market during the pandemic. In April, we announced our intention to acquire Pinnacle Care, a leading U.S. healthcare navigation and medical intelligence provider, which will become part of our U.S. stop-loss and health business. This acquisition, which we expect to close later this year, changes stop-loss in health from a business that reimburses employers after an employees care has occurred, the one that gets us involved through Pinnacle Care right from initial diagnosis. This should lead to better health outcomes and better cost management, including lower stop-loss claims for our clients. These new capabilities are exactly in line with our purpose of helping clients live healthier lives. Turning to Slide five. We continue on the journey of accelerating everything digital, driven by our purpose and powered with an unrelenting focus on clients, and this quarter was no exception.

In Canada, our digital coach, Ella continues to connect with our clients, helping them save for their future and ensure protection for their loved porters. We're making it easier for clients to do business with us, holding over 61,000 virtual advisor client calls in the first quarter, a big jump compared to the 5,000 we held in Q1 of last year. This quarter, we used e-signatures in Canada for over 85,000 transactions, and that compares to 14,000 in the same period last year. In April, we launched Stitch in select U.S. states. Stitch is an innovative, supplemental health offering, enabling members to buy coverage directly from Sun Life online through their worksite benefits program at any time.

This is an important offering as it allows members to take their insurance with them even if they leave the company and will also protect part-time and GIG workers who typically are not eligible for employee benefits. We've also made great progress in Asia, where 66% of new insurance applications were submitted via an electronic application, an increase of 14 percentage points over the fourth quarter of 2020. We also introduced new digital, personal accident and cancer products in collaboration with one of our bancassurance partners in Vietnam to help our clients when they need us the most.

These digital products offer a seamless experience to purchase coverage entirely online and receive policies in just minutes via straight through processing. In the Philippines, we launched a premier digital on-demand wellness platform to help clients focus on their health. The platform, which is called GoWell Studio, offers a variety of features, including virtual exercise programs, guided meditation and healthcare awareness content. So Sun Life is off to a strong start in 2021, with double-digit earnings growth, a strong ROE and a strong balance sheet with ample flexibility.

As we look ahead, we are well positioned to benefit from an expanding U.S. economy, the growth in Asia, driven by its compelling demographics and strong momentum in Sun Life Canada. Asset management, as you know, is a large part of our business, and we're well positioned in MFS, SLC management and our other managers as clients seek positive alpha in this lower-return world. And our insurance businesses are well positioned to do more for clients whose awareness of and need for protection has been reinforced by this pandemic. I'm now pleased to introduce our new CFO Manjit Singh, who joined Sun Life in March. Manjit brings a wealth of knowledge, including 20 years of experience at one of Canada's largest financial institutions. We're thrilled to have Manjit onboard, and he'll take us through the first quarter results. Kevin Strain is also here today and will be available with us for the Q&A portion of our call this morning.

And now I will turn things over to Manjit.

Manjit Singh -- Executive Vice-President and Chief Financial Officer

Great good morning, and thank you, Dean. I'm thrilled to join the Sun Life team. This is a global organization with a rich history and a proven track record of strong performance. I've spent the first five weeks of my time at Sun Life, meeting colleagues across all of our businesses and support functions. It's clear to me that Sun Life has a special culture, a culture where employees, advisors and partners work together to deliver for all of our stakeholders, especially our clients. I look forward to contributing to Sun Life's future success. Now let's turn to Slide seven for an update on our first quarter results. Amidst the ongoing challenges from the global pandemics, Sun Life delivered reported net income of $937 million, reflecting growth in underlying net income and a favorable impact from equity markets and rising interest rates.

This was partially offset by fair value adjustments on MFS share-based awards, reflecting strong earnings and AUM growth. We also recorded a $57 million restructuring charge related to our workspace strategy, which will generate pre-tax savings of approximately $20 million per year. Underlying net income for the quarter was $850 million, an increase of 10% compared to the prior year, driven by business growth as well as favorable morbidity and credit experience. This was partially offset by lower-investing activity gains compared to elevated gains in the first quarter last year as well as a $31 million unfavorable currency impact. Underlying earnings per share for the quarter were $1.45, an increase of 11% from the prior year with underlying ROE of 15.3%.

Assets under management at the end of the first quarter exceeded $1.3 trillion, reflecting market appreciation during the quarter, net inflows at SLC Management and the acquisition of Crescent Capital. Book value per share declined modestly from last quarter, reflecting declines in AFS unrealized gains, foreign currency translation from a stronger Canadian dollar and the impact of the Crescent acquisition, offset by growth in reported net income. Our capital continues to be strong with LICAT ratios of 141% at SLS and 124% at SLA.

The decline in the SLF ratio from the prior quarter relates -- reflects the Crescent Capital acquisition, funding for the ACB bancassurance agreement arrangement, redemption of subordinated debt and the impact of rising interest rates. The funding of the ACB bancassurance agreement and rising interest rates also impacted SLA's LICAT ratio. Our financial leverage at the end of the first quarter was 22.7%. This remains below our long-term target of 25%, and coupled with a $2.3 billion of excess cash at the holding company provides us with significant financial flexibility. Slide eight outlines the performance for each of the business groups.

Canada's reported net income of $405 million increased $447 million over the prior year, predominantly driven by favorable equity markets. Our rising interest rates were also favorable. This was largely offset by tighter credit spreads. Underlying net income increased by $29 million, driven by business growth and favorable credit and mortality experience, partially offset by lower investing gains.

U.S. reported net income of $211 million, increased $47 million compared to the prior year, primarily driven by lower ACMA charges and favorable market-related impacts. Underlying net income increased $10 million, reflecting favorable morbidity experience in stop-loss and long-term disability. This was partially offset by lower-investing gains, lower earnings on surplus and unfavorable mortality experience. Asset management reported net income of $230 million, a decline of $9 million compared to the first quarter last year as fair value adjustments for MFS share-based awards were largely offset by an increase in underlying net income. MFS underlying net income of $291 million was up $49 million, driven by AUM growth. MFS ended the quarter with a pre-tax net operating profit margin of 39%. SLC Management's underlying income was in line with the prior year. The contributions from Infrared and Crescent were offset by timing of compensation expenses and lower real estate fund catch up fees.

As discussed at the Investor Day in March, SLC Management has good fundamentals with significant amounts of capital that will be invested and become free generating. In Asia, reported net income of $198 million increased by $98 million from the prior year as the business benefited from favorable market impacts. Underlying net income increased $4 million, driven by a 24% growth in expected profit and new business gains, offset by unfavorable mortality experience. Corporate had a net loss of $107 million, a $37 million increase from the prior year, primarily due to the $57 million real estate restructuring charge.

The underlying net loss in corporate was $56 million, a $12 million increase from the prior year. The increase reflects higher spend in corporate initiatives and an increase in the value of share-based incentive compensation, partially offset by a higher contribution from the U.K. business. Slide nine outlines the sources of earnings. Expected profit grew 10%, driven by good results in asset management as well as business growth and higher fee-based income in Canada and Asia. Excluding the impact of currency and asset management, expected profit grew 6% over the prior year. Effective this quarter, we reflected a methodology change to include new business income for the U.S. Group Benefits business and expected profit.

This is consistent with the treatment for the Group Benefits business in Canada. Going forward, we do not expect to see new business gains in our U.S. sources of earnings. This change has been reflected for prior periods. Total new business gains increased by $21 million over the prior year, reflecting pricing actions in the Canadian individual insurance business and higher sales in Asia. Experienced gains of $425 million were largely driven by market-related impacts on rising interest rates and equity markets. We also benefited from investing gains, favorable morbidity in the U.S. and positive net credit experience.

This was partially offset by expense experience as well as unfavorable mortality experience in the U.S. and Asia. Earnings on surplus declined $8 million year-over-year, reflecting the impact of lower yields. Slide 10 outlines insurance and wealth sales for the first quarter. Individual insurance sales were up 12%, while group sales were down 24% compared to the prior year. The increase in individual insurance sales was driven by a 27% increase in sales in Canada, primarily from strong par sales. In Asia, Vietnam posted strong sales growth driven by our new bancassurance partnerships. India, China and Malaysia also saw strong sales growth with the Philippines and Indonesia down on COVID-related lockdowns.

Sales in the international hubs business were also impacted by the lockdowns and travel restrictions. The year-over-year decline in group sales was primarily attributable to fewer large case sales coming to market in the Canadian Group Benefits business. U.S. group sales were relatively flat year-over-year, as the higher sales and employee benefits were offset by lower stop-loss sales. Wealth sales, excluding asset management, were down 3% from the prior year. Wealth sales in Canada decreased 21%, primarily driven by a large retained case in Group Retirement Solutions in Q1 of 2020. Mutual fund sales and sales of guaranteed investment products both increased. Asia wealth sales were up 48%, excluding the impact of foreign exchange, driven by mutual fund sales in India, the pension business in Hong Kong and money market sales in the Philippines. Asset managed gross flows of $58.2 billion were up 12%, driven by higher flows at SLC Management. Value of new business increased 10% compared to Q1 of 2020, reflecting strong sales and higher-margin VNB products across both insurance and wealth.

Turning to Slide 11. Operating expenses were up 20% from the prior year. 12 percentage points of the year-over-year increase was driven by fair value adjustments related to share-based incentive compensation at MFS and Sun Life, the run rate impact of newly acquired businesses in SLC Management and the real estate restructuring charge, partially offset by favorable currency impacts. Higher controllable expenses and contractual volumes contributed to the remaining eight percentage points of the year-over-year increase. The asset management business accounted for just under 2/3 of that growth primarily driven by expenses related to strong AUM growth.

And the remaining increase of approximately 3% relates to business growth and organic growth initiatives, including our continued investments in digital. Overall, this quarter's results highlight the strength of Sun Life's four pillar strategy. It was a good start to the year. We remain focused on continuing to invest in our businesses to drive future growth while maintaining expense discipline.

Now I will hand it back to Yaniv to begin the Q&A portion of the call.

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

Thank you, Manjit. [Operator Instructions] I will now ask Adam to poll the participants.

Questions and Answers:

Operator

[Operator Instructions] And your first question comes from the line of John Aiken of Barclays.

John Aiken -- Barclays Bank PLC -- Analyst

Good morning. Given the current situation in India, I know this is reasonably early days relative to what's happening, but are you able to extrapolate any impact on the businesses that you have in the region?

Dean A. Connor -- Chief Executive Officer, Sun Life

Leo, do you want to take that?

Leo Grepin -- President, Sun Life Asia

Yes. Good morning, John, thanks for the question. As you mentioned, the situation is very early days right now in the second wave in India. And the situation is evolving quickly. At this point in time, I'd have to say our focus is really on the safety of employees, partners and clients. And we haven't -- I think it's too early to tell what the medium-term impact is going to be of what's currently happening over there. What I would say is that we are benefiting from the capabilities we have in India in terms of digitally enabling our employees as well as digitally enabling advisors. And so operations are fully functional, and we're continuing to see sales flow through. But I think it's just too early to have an indication on whether there will be a material impact.

John Aiken -- Barclays Bank PLC -- Analyst

Understood. Thanks, Leo. And for my second question, given the fact that you guys took a restructuring charge to rationalize your real estate footprint, does this have any implications for the real estate holdings that you have within your broader portfolio?

Dean A. Connor -- Chief Executive Officer, Sun Life

Steve, why don't you take that?

Stephen (Steve) C. Peacher -- President, SLC Management

Thanks for the question. It's on everyone's mind, what's the impact on commercial office space, vacancies, valuations. And so we get this question a lot. I think that -- and we have real estate, of course, on our own balance sheet, and we manage big portfolios of real estate for our third-party clients. I think our answer is generally that, A, it's still evolving. We actually are seeing in many of our properties, more of a return to the office than we might have expected. However, we're certainly going to see in some instances, like with ourselves at Sun Life that people are going to reduce their office space.

We really think it's going to be property and city specific. So there will be certain cities like in Asia, Tokyo, for instance, where we don't think there'll be any impact at all. Some cities like New York may have a bigger impact, less so in a city like Boston. Certain properties may be more impacted than others. So overall, I think, certainly, we're going to see a decline in occupancy for some period across commercial office space broadly, but the impact will be very specific by property and city. Overall, I think our properties are well positioned. We've got strong properties in good markets. And so we're not too worried about the overall impact on our -- the specific properties that we own.

John Aiken -- Barclays Bank PLC -- Analyst

Thanks for the color, Steve.

Operator

And your next question comes from the line of Meny Grauman with Scotiabank.

Meny Grauman -- Scotiabank Global Banking and Markets -- Analyst

Hi. Good morning. So it's been a year since COVID hit basically. I'm wondering if you have a better sense of the ultimate impact of the pandemic on insurance experience specifically. If you go across your segments, we're seeing morbidity, move one way, mortality experience move another way, but I'm wondering on a net basis, as you look at the entire enterprise on a net basis, kind of what is winning out and what do you think is the ultimate -- what is going to be the ultimate impact of COVID on those insurance experience risks?

Dean A. Connor -- Chief Executive Officer, Sun Life

Meny, it's Dean. Thanks for your question. I'm going to ask Kevin Morrissey to answer that. But I think I'll just start at the top of the house and say that one of the reasons our earnings haven't been tremendously impacted by COVID is this balanced and diversified business model, where, yes, we have elevated claims on life insurance, offset somewhat by reduced claims and morbidity in certain areas of morbidity and offset by annuities. And so that balanced diversified business model has really served us well, but I'll turn it over to Kevin to take it to the next step.

Kevin Morrissey -- Senior Vice-President and Chief Actuary

Thanks Dean, and thanks, Meny, for that question. So starting with mortality. As Dean mentioned, we've really benefited from the geographic as well as product diversification. So overall, we haven't seen a big impact, as you would have noticed to our financial statements where we've had some gains and losses over the quarters. On the morbidity side, largely, we've been taking gains as you would have witnessed, especially last year with a decrease in utilization. However, that is normalizing across many of the products. And I would say that we'll have to see what happens longer term in terms of long-term disability and potential longer-term impacts related to the COVID disease as well. On the lapse side, we have experienced a bit of an uptick in the lapse losses.

Since the start of the pandemic, what we've seen is policyholders seem to be holding on to their policies longer, which is a good thing for the clients and is a testament to the value to clients in this challenging time during the pandemic. So we have seen somewhat higher losses from lapses. But at this point, it's not clear what will happen, whether the policy or behavior will revert back at the end of the pandemic. So all in all, I'd say we've had quite good success in terms of our balance and diversified business. So we haven't had big impacts, as you will have witnessed.

Longer term, we're continuing to monitor the trends and the longer-term impact, as you will have also noted, we have not made any updates to our longer-term actuarial assumptions. And I think it's just really too early at this point to make that call, but we are continuing to monitor that closely.

Meny Grauman -- Scotiabank Global Banking and Markets -- Analyst

And just as a follow-up, I mean, that's what I'm trying to get at, whether what you've seen so far kind of is indicative of what we're likely to see once this all wraps up? Or is there something to be conscious of potential unanswered questions or risks in terms of how this issue plays out toward the tail end of COVID and maybe beyond?

Kevin Morrissey -- Senior Vice-President and Chief Actuary

Tough question to answer, Meny. I would say there are certainly a lot of unknown still ahead of us. We've got optimism as the vaccines are being rolled out. But with the new variants of the disease, it does still raise a lot of questions, both on the insurance side and then more broadly on the economic side. So I'd say that we just -- we don't know at this point. I think that what we do now is we've got a really good risk profile position. We're comfortable with that and how we've managed our risk and our overall profile. And so we are optimistic about the future, and we'll have to wait to see how that will unfold ultimately.

Meny Grauman -- Scotiabank Global Banking and Markets -- Analyst

Thank you.

Operator

And your next question comes from the line of David Motemaden with Evercore.

David Motemaden - -- Evercore ISI Institutional Equities -- Analyst

Hi. Good morning. I guess I just had a question in Asia. And I'm wondering if you could help me maybe think about just looking at expected profit on in-force, how much of that is driven by wealth-related sort of fee-related earnings versus insurance earnings? And I also, I guess, maybe if you could just comment, Leo, just great to see the wealth sales up 48% year-over-year on a constant currency basis. Also wondering maybe you could talk about net flows after thinking about withdrawals?

Leo Grepin -- President, Sun Life Asia

Yes. Thanks, David. It's Leo here. So on the first part of your question and the source of the gains in expected profit. So we have -- we are seeing some good improvement over time. It's primarily driven by business growth on the insurance side and higher fee-based income on both the life and the wealth side of our business. I can't give you precise numbers.

But the core of our business in Asia still remains primarily insurance driven, say about 80% insurance driven, roughly speaking, with 20% being more pure wealth type of business. Now what's important to note is that a good chunk of our core insurance products are being used as savings vehicles. So while their insurance chassis, some of that would be purchased by our clients for savings purposes. So that's on your first question. On your second question around net flows across our business, I don't have those exact numbers off the top of my head, David. We'll have to come back to you on this one.

David Motemaden - -- Evercore ISI Institutional Equities -- Analyst

Okay. That's helpful. And then maybe if I could just switch gears and add one in for Dan on the U.S. business. Good to see a continued year-over-year growth in the employee benefits, in-force premium again this quarter. I'm wondering if you could just talk about and maybe quantify what you're seeing in underlying covered lives, if that's still a headwind from an exposure standpoint and how we should be thinking about that over the course of the rest of the year? If employment does improve, would you expect to see a meaningful increase just from exposure growth in covered lives?

Daniel R. Fishbein -- President, Sun Life Financial U.S.

Good morning, David, it's Dan. Thank you for the question. We're really seeing a pretty rapid recovery in employment in the U.S. So I think we had mentioned in the last call that we estimated about a 3% reduction in covered lives at the bottom, but that's largely come back. As we look at our January one enrollment, it's a little hard to parse out all the different factors in terms of number of employees versus number of people who enroll, but generally enrollment was higher in January than it had been in the prior January. So the economy in covered lives seems to be snapping back rather quickly and really never went down that much in the first place.

David Motemaden - -- Evercore ISI Institutional Equities -- Analyst

Great. Thank you.

Operator

And your next question comes from the line of Gabriel Dechaine with National Bank Financial.

Gabriel Dechaine -- National Bank Financial, Inc., Research Division -- Analyst

Good morning. The expenses at MFS, can you give a bit more -- I mean, that's where there's some variation versus what I was expecting there this quarter, if there's anything specific you can flag? Then sticking to this group more cross-border commentary here, and you talked about the benefit utilization outlook. Is that comment more U.S. skewed, we could see the employment accelerating there. Canada is largely in lockdown, which might have a more lagged impact on benefits utilization? I'm just trying to get a sense for how long some of these morbidity gains can persist?

Dean A. Connor -- Chief Executive Officer, Sun Life

It's Dean, Gabriel. Thanks for your questions. Why don't we start with Mike on the expenses at MFS. And then we go to Dan on and then Jacques on the group benefit morbidity trends.

Gabriel Dechaine -- National Bank Financial, Inc., Research Division -- Analyst

Thanks, Dean.

Michael William Roberge -- Chairman of MFS Mclean Budden Limited & Co-CEO of MFS Investment Management

Gabriel, it's Mike. Yes, on expenses, there's nothing -- nothing to call out on expenses. The expenses that are up year-over-year, those that are tied to profitability or asset-based fees that we pay distributors. If you look year-over-year on discretionary expenditures, they're relatively flat. So there's nothing really to call out there.

Daniel R. Fishbein -- President, Sun Life Financial U.S.

And this is Dan. On the group benefits morbidity in the U.S., we saw a very favorable experience in the first quarter in our stop-loss business. Now some of that relates to just how prior periods are completing. One comment that I would make within there is we've noticed lower cancer diagnoses in our stop-loss business. So we do have a little bit of concern that there's delayed diagnosis because of people not seeking care throughout the pandemic, but overall stop-loss continues to be quite favorable. In our long-term disability business, we had a favorable quarter as well for morbidity. That was largely based on resolutions, which suggests that there are jobs for people to go back to kind of consistent with the question I have answered a moment ago. And overall, our morbidity was favorable in the first quarter.

Jacques Goulet -- President, Sun Life Financial Canada

Gabriel, this is Jacques. I can go next. So your question was specifically on benefit utilization. It's pretty well back to normal. We did have, as you know, a favorable experience in quarter one 2020 that was driven in large part by the second half of March closure, but we're pretty well back to normal. The morbidity issues in Canada this quarter is more to do with our visibility business.

And one of the -- you might recall because I talked about this before, we're watching very closely incidents as well as recoveries. Incidents are in line with what we're seeing in recoveries, and this is, in my view, COVID related is a lack of access to care, which means that it makes it longer for people to get back to work. So that's really what's the main driver of our morbidity experience this time around.

Gabriel Dechaine -- National Bank Financial, Inc., Research Division -- Analyst

Alright. That's interesting clarification.

Operator

And your next question comes from the line of Tom MacKinnon, BMO Capital.

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

Yes. Thanks very much. Good morning. A couple of things. With respect to Asia, if I look at the impact of new business, it was modestly negative, but if I look at it compared to the fourth quarter, it's a big improvement despite the fact that sales in the first quarter of this year are actually lower than they were in the fourth quarter. So was that mix related? And how sustainable is that?

And then on the investment gain, is a $74 million, I think you used to talk about $30 million to $35 million in the quarter. So why was it outsized? Are we still looking at something like 30% to 35% going forward? And then finally, you have another expense hit of $33 million in the quarter, and I think that's related to kind of special projects. But every company has special projects. So why aren't they just like part of your expected profit? And what is the outlook for those things going forward? Thanks.

Dean A. Connor -- Chief Executive Officer, Sun Life

Yes. Thanks very much. Good morning. A couple of things. With respect to Asia, if I look at the impact of new business, it was modestly negative, but if I look at it compared to the fourth quarter, it's a big improvement despite the fact that sales in the first quarter of this year are actually lower than they were in the fourth quarter. So was that mix related? And how sustainable is that?

And then on the investment gain, is a $74 million, I think you used to talk about $30 million to $35 million in the quarter. So why was it outsized? Are we still looking at something like 30% to 35% going forward? And then finally, you have another expense hit of $33 million in the quarter, and I think that's related to kind of special projects. But every company has special projects. So why aren't they just like part of your expected profit? And what is the outlook for those things going forward? Thanks.

Leo Grepin -- President, Sun Life Asia

Yes. Good morning, Tom, thanks for the question on new business gain. Let me touch it from a few different facets. If you look at the results in Q1, we did have lower new business gains year-over-year, which we're quite happy about. You mentioned a shift in business mix. That is one factor that we're seeing. But I'd call out a few others. We did see strong sales across the region with double-digit growth in four of our markets that have good new business gains.

And I know that it's lower quarter-over-quarter, but higher year-over-year. There is a mix impact here in terms of the type of products that we are selling this quarter. So that explains the difference in terms of lower sales, but similar quarter-over-quarter new business gain. The other things that are happening is we are seeing some stronger sales as you know in Vietnam from our new bank partnerships, and so that is contributing to the results.

And then we've also seen improvements in our expense gap driven by the work we've been doing on expense discipline, managing our expenses as well as improvements in our product designs. And so all of those things, it's -- yes, it's the product mix, but it's a number of management actions that we've been taking during the pandemic and even before that are really contributing to all of this, investment in distribution excellence, improvements in our expense structure, digitization of our business to improve client experience. All of these things are contributing to the improvement in new business gains.

Dean A. Connor -- Chief Executive Officer, Sun Life

And then, Randy, why don't you talk about investing gains. And I think part of the question was also the guidance around that, and Manjit will cover off that part of it. But Randy, over to you.

Randolph (Randy) Brown -- Chief Investment Officer

Okay. Good. Tom, thank you for the question. This is Randy. So we had strong activity gains in the quarter, really driven by strong sourcing in private fixed income. So we were able to source some attractive deals that were negotiated, and so that's really what drove those activity gains. And you do see lumpiness in that number quarter-to-quarter, but they were high-quality gains this quarter.

Dean A. Connor -- Chief Executive Officer, Sun Life

And let me turn it over to Majit in terms of guidance.

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

Was it a -- OK, sorry.

Dean A. Connor -- Chief Executive Officer, Sun Life

Sorry, Tom, did you have another follow up?

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

No, I was just -- where you're going to talk about the guidance with respect to...

Manjit Singh -- Executive Vice-President and Chief Financial Officer

Yes. Good morning. It's Manjit. So I agree with Randy's comments that these will bump around quarter-to-quarter just given the market environment. The previous guidance, we've sort of given you sort of $15 million to $30 million pre-tax, and we think we're over a cycle, that's still an appropriate amount.

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

Okay. Great. And then the last one on the other expense?

Kevin Morrissey -- Senior Vice-President and Chief Actuary

Yes. Tom, this is Kevin. Thanks for that question. So the minus $33 million this quarter, it was on the high side. You asked about this -- was that driven by special projects. The answer is really no. It really wasn't driven by special projects, although special projects are a component within that line of the source of earnings. You also asked about why is it not an expected profit. I wanted to highlight that we do have special projects, and we do have project costs that are included in the expected profit line.

Not all of them, though. And so the distinction that we make is really kind of the longer-term nature of them. So if projects or costs are going to be longer-term, more sustained, but we do include that in expected profit. Some of the shorter-term projects like the IFRS 17, which are kind of taking this year and then will be declining significantly going forward. Those are in the other expense line. So the driver this quarter, we have a lot -- it's tough to point to one thing, frankly, because we do have -- it could be a dozen or more small things, and they are all small any business group and there's pluses and minuses.

But one of the things I'll highlight this quarter is that the accounting recognition by quarter can be different than the anticipated -- what's anticipated in the actual liabilities for some sources, for example, premiums and commissions this quarter. So there was a bit of a mismatch in timing on the premiums and commission side. So it did create some quarterly volatility, but that will even out over the course of the year. And I do also just want to remind you that the minus $15 million guidance that I've referred to in the past is really a longer-term average. And you should expect -- should not expect to see an even quarterly trend and that will bump up and down as we have seen over the last over the last four quarters. In fact, the average has been minus 7%. So it's actually been below that run rate, but it will be up and down quarter-to-quarter.

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

Okay. Thanks for that.

Operator

And your next question comes from the line of Paul Holden of CIBC.

Paul Holden -- CIBC Capital Markets, Research Division -- Analyst

Thank you.. Good morning. I'll just ask one question. I want to ask about Sun Life participation in the pension risk transfer business, given the recent transaction with GM Canada. So two questions on this front. One is, can you give us a better sense of risk appetite in this business and I partly asset from the context of I think the GM business was the first one where you kind of spread around the risk.

So are there more -- is there more willingness to do that, bringing in multiple partners? And then two, I mean, how do you kind of view that market opportunity over the next 12, 24 months? We are hearing anecdotal evidence that there should be an increased amount of activity in the near term. So I'll leave it there with those two questions.

Jacques Goulet -- President, Sun Life Financial Canada

Dean, do you want me to start? This is Jacques.

Dean A. Connor -- Chief Executive Officer, Sun Life

Yes. Yes, please Jack.

Jacques Goulet -- President, Sun Life Financial Canada

Thank you, Dean, and thank you, Paul, for your questions. Maybe I'll start by just to make sure there's no confusion. I'll first by pointing out that while the press release on GM came out in the first quarter, this is really a deal that we did in Q3 last year, Paul. And there's a timing in terms of sometimes where the -- when we put the thing on the book and when we make the announcement. So that's the first point.

In terms of the the risk appetite and the market opportunity, I think you will remember, we view defined benefit solutions, very much as one of our growth engines in Canada. We think this is a very healthy market. There are two other similar markets in the world, that's the U.S. and the U.K., and they're much more mature and develop. So we think that's a market that has a lot of runway ahead of it. There are situations where clients will spread, as you say. And the GM one, as you saw, we got the bulk of it, but we did give some slides with its further interest. We've been the leader in that business, Paul, for basically eight or nine years now.

We have, in my view, and probably by us, but the strongest team in the industry on this. So one of the things that does for us is we tend to basically have a look at pretty well every deal that comes to market, and it allows us to be selective on which ones we're more interested in and which ones we might be less. So overall, this is -- this very much remains one of our growth engine. We think the market is going to continue to grow. Many defined benefit plans are on, what we call, derisking light path. And the last step, as you know, on a path like this, is to do a So we think we're very well positioned, and that's a very, very healthy market for us.

Paul Holden -- CIBC Capital Markets, Research Division -- Analyst

Okay. So just so I understand with that GM deal, in particular, if you had the option, you might have taken 100% of it, but it really is GM's option to share the risk among a number of players?

Jacques Goulet -- President, Sun Life Financial Canada

Yes. We go through a whole process and these things of analyzing how we want to approach it. And in some cases, we might be happy ourselves not to take the whole deal. And in other cases, we'll want to take the whole deal. So I won't speak deal to deal, but as I said earlier, we have the ability, which is nice to be quite selective on these deals, and we'll continue to exercise that.

Paul Holden -- CIBC Capital Markets, Research Division -- Analyst

Okay Thank you.

Operator

And your next question comes from the line of Doug Young of Desjardin Capital Markets.

Doug Young -- Desjardins Securities Inc. -- Analyst

Good morning. Question for Dan, I guess. We saw expected profit down in the U.S., 8%. And I would hazard a guess, that's probably related to the adjustments made for the in-force. But what I wanted to understand, was there an impact at all from your outlook on the group business? And with that, can you talk a little bit more about any competitive threats or trends that you're seeing in the group business? You mentioned it last quarter. Just hoping to get an update.

Dean A. Connor -- Chief Executive Officer, Sun Life

Yes. Thanks, Doug. The primary drivers for the change in expected profit, as you noted, we're the lower interest rates and its impact on the IFM business. In the group business, we included some impacts from COVID, which at least temporarily offset gains from business growth. And there's also an impact from foreign exchange, which has changed pretty significantly year-over-year. As for the -- whether or not that reflects increased competitiveness or different conditions, overall, not really.

The COVID impacts obviously are something affecting all group carriers, particularly in the life mortality, and that should start to wane over time. Obviously, we see -- we hope that will improve soon. So that's more of a temporary impact. Overall, in terms of competition, of course, it remains a very competitive market. But we don't see any substantial changes in the competitive environment year-over-year.

Doug Young -- Desjardins Securities Inc. -- Analyst

So you're building in a weaker group results from an expected profit perspective because of your outlook for higher mortality experience in the group business over the next year. Is that safe to assume?

Dean A. Connor -- Chief Executive Officer, Sun Life

Well, that's one of the drivers, especially during the early part of the year with the kind of mortality we've been seeing. So we did build some of that in. So that -- but the other factors are important as well.

Doug Young -- Desjardins Securities Inc. -- Analyst

Yes. Okay. That's fair. And then maybe for Steve, SLC underlying earnings were down 8%, definitely below what we were looking for. I just -- and obviously below maybe the guidance or the -- what we talked about maybe at the Investor Day, obviously, looking out. But what I'm just wondering, is there anything unusual in these results that kind of weighed on it this quarter? Hoping to get a little more color?

Stephen (Steve) C. Peacher -- President, SLC Management

Yes. Thanks, Doug. I'm glad you asked the question. As Manjit mentioned, we did have some kind of term one-off or timing expenses in the quarter. The biggest related to some appreciation in long-term incentive units at Bentall Greenoak that we expensed in Q1 and hadn't accrued for throughout 2020. We had some other charges related to some retirements and some other things related to compensation. And all those things hit in Q1, and it was a quarter when we didn't have kind of an offset where we had some kind of onetime revenues as we saw in the fourth quarter. I would say that our -- the underlying earnings within our core earnings in the quarter were right in line with our expectations and very consistent with the guidance that we gave during Investor Day.

And maybe I can take the opportunity just to make a few key points that may be useful as you track our progress going forward. And the first is that this is a pretty stable business because our AUM is stable, and that means that the kind of the basic core earnings driven by management fees are stable and they've been rising as our AUM has grown. But on a quarterly basis, you will see some fluctuations from time to time. In the fourth quarter of last year, we were above that kind of core earnings rate because we had some catch-up fees hit in the quarter, some performance fees and those fell at the bottom line this quarter, as I mentioned, we had some one-off expenses.

But the underlying kind of core earnings rate should continue to be stable and rising. And as I said, the first quarter was definitely on that basis in line with our guidance and our expectations. But that leads to my second point, which is I think one of the best ways to track the health of this business over time is by tracking our inflows, our ability to attract new investors to our platform. And this quarter, as you see in the numbers, the inflows are very strong. On Dean's first slide, we noted that fee eligible inflows were $8.6 billion. And even if you deduct the $2 billion of outflows, that's almost 4% of AUM, so net flows of almost 4% of volume in the quarter. So those are going to be also lumpy to lumpy quarter-to-quarter.

But as long as we can continue to do that, the core earnings power of SLC is going to continue to rise. And then the only -- the final point I'll make is that I think the breadth of those flows is important. We've got a broad platform across many different asset classes. And this was a good example of this quarter. We -- that 8.6% is made up of wins across the platform from fixed income, closing funds and private credit, raising CLO doing a follow-on offering for one of our listed funds in the U.K. and infrastructure, et cetera. So we feel like we're starting the year with some pretty good momentum.

Doug Young -- Desjardins Securities Inc. -- Analyst

Sorry, Steve, if I could just clarify, the $11 million, is that what you're saying is core? That's reasonable. Are you saying $11 million plus if you remove some of the unusual expenses like the retirement and incentive units, that would be more where we should think about?

Stephen (Steve) C. Peacher -- President, SLC Management

No, I'm saying -- yes, I'm sorry. The $11 million, I think, is kind of lower than we would expect because of those expenses that I would kind of say were unusually large this quarter.

Doug Young -- Desjardins Securities Inc. -- Analyst

And have you quantified those?

Stephen (Steve) C. Peacher -- President, SLC Management

We haven't -- I don't think we've called those out in our specific results. But what I will say is this, we kind of -- I think during Investor Day, gave a sense of what we thought our core underlying earnings rate was today. This quarter was consistent with that, and it's also consistent with the longer-term guidance that we've given.

Doug Young -- Desjardins Securities Inc. -- Analyst

Okay. Thank you.

Operator

And your next question comes from the line of Nigel D'Souza of Veritas Investment Research.

Nigel D'Souza -- Veritas Investment Research Corporation -- Analyst

Thank you. Good morning. I had a question for you on interest rate sensitivity. And when I look at your table on interest rate sensitivity and kind of drill down to the OCI component, I noticed that the impact through OCI from a 50 basis point parallel shift is still about $250 million this quarter versus last quarter, so it hasn't changed. And I understand that you round that up to -- down to the nearest $50 million, but maybe could you speak to what's helping you minimize the interest rate sensitivity or the impact of interest rate shifts to LICAT? And how you've managed to mitigate that risk?

Dean A. Connor -- Chief Executive Officer, Sun Life

Nigel, it's Dean. Thanks for that question. We're going to ask Kevin Morrissey to take it?

Kevin Morrissey -- Senior Vice-President and Chief Actuary

Yes. Thanks for that question, Nigel. So in terms of our LICAT or sensitivity, you would have noticed that the sensitivity did come down this quarter. And that's a bit of a function of the interest rate environment. So without going into too much detail because there is quite a bit of complexity into all the moving pieces in the numerator and the denominator. But the size of the shocks, I will know, do go up and down with the different changes in an economic environment.

And so what we've observed is in the current environment, which is higher interest rates generally, especially across North America, we've seen our sensitivity come down on both the up and the down charts. And I think that's a good profile. And I think it's also a bit of a natural profile, too, as the environment becomes less stressed, we're seeing kind of less movement and less counter kind of cyclicality in the moves as we're moving out of the stress interest rate environment.

Nigel D'Souza -- Veritas Investment Research Corporation -- Analyst

That's really helpful. And if I could just finish off with a broader question on earnings on surplus. We've seen a pretty sizable increase in yields recently in the first quarter. I know it takes a while for that to flow through to invested assets and invested asset returns, but do you have a sense of when underlying net income could start benefiting through higher earnings surplus if yields stay where they are or continue to move higher?

Kevin D. Strain -- President

I can -- it's Kevin Strain. I can take that one. We were still expecting the earnings on surplus to be roughly $100 million. That's kind of what we've talked about in the past, and you can kind of expect it to be in that range. We will get a benefit longer term of the rising interest rate, but we're also losing some AFS gains. And so you get kind of some pluses and minuses. And so we're kind of focusing on the net number there, the $100 million.

Nigel D'Souza -- Veritas Investment Research Corporation -- Analyst

Okay. That's helpful. Thank you.

Operator

And your next question comes from the line of Hung-Fai Lee with Dowling & Partners

Hung-Fai Lee -- Dowling & Partners Securities -- Analyst

Good morning and thank you for taking my questions. My first question is about net flows in MFS. You have very strong gross sales. I think it might be one of the strongest in mutual funds. But redemptions kind of spiked up in the quarter. I was just wondering if you have any color that you can share in terms of what you saw in mutual fund net flows?

Michael William Roberge -- Chairman of MFS Mclean Budden Limited & Co-CEO of MFS Investment Management

Humphrey, it's Mike. Yes, I mean, clearly had strong gross sales in the quarter. I mean, there are two parts of the business where we saw higher redemptions. The first would be where we were not -- I guess, which was not surprising, was the institutional business. That's primarily today an equity book of business and we see when markets are at all-time high, you see derisking and rebalancing back into fixed income during those periods of time, which is the converse of what we saw a year ago where we saw better flows in that business. So that was not surprising.

Year-over-year in our non-U.S. retail business, so our U.S. retail business continues to generate strong growth and strong net. On the non-U.S. retail, we did see higher redemptions in the quarter, driven by, I think, a couple of factors. One is, we've seen sort of the market, particularly in Europe, move more to thematic product. So as you see things like technology and many of the other themes that are playing out in the marketplace, we do see investors chasing some of those trends within that channel. The second to call out would be a year ago, our best selling product was a hedged equity product.

And so it's a product cycle that's going to produce a return relative to cash. Investors cared a lot about that a year ago when they were worried about downside, and investors today clearly aren't focusing on downside. And so we've seen net flows go from positive in that particular product to negative. So those would be the things that I'd call out that perspective. But again, last year was an outsized year for us relative to the industry, driving really strong net when the industry continued to struggle and active. And I think the way that we look at it is a relatively flat quarter when money continues to move and chase performance, we're relatively pleased. The thing that we control is gross flows, and we continue to see strong growth.

Dean A. Connor -- Chief Executive Officer, Sun Life

Humphrey, it's Dean. Thank you for that question. I think the -- you're right to note the interest in these businesses. But I would say that, that's not new. We've seen lots of interest in closed block, especially closed block insurance businesses in the United States over the past number of years. And my guess is, as you look ahead, you'll continue to see lots of interest in those businesses, particularly as more capital moves from public to private hands. So I think we've been consistent on this.

We've been focusing on improving the execution and the performance of the in-force management business. We've made great progress, great progress on expenses, on capital, on tax, on dealing with some of the issues, including stranger-owned life insurance, where we've made great progress sorting out some of those issues. And we still see some -- there's some opportunity there left yet, but clearly, it's not a growing business for us. And that's something that we'll think about as we go ahead. Like we do with all of our businesses, we think about where they fit in the overall four-pillar strategy. And you've seen us add to track, change that mix over time. So we think about that for all of our businesses.

Hung-Fai Lee -- Dowling & Partners Securities -- Analyst

Got it. Thank you.

Operator

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

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

Thank you, Adam. I would like to thank all of our participants today. And if there are any additional questions, we will be available after the call. Should you wish to listen to the rebroadcast, it will be available on our website later this afternoon. Thank you, and have a good day.

Operator

[Operator closing remarks]

Duration: 60 minutes

Call participants:

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

Dean A. Connor -- Chief Executive Officer, Sun Life

Manjit Singh -- Executive Vice-President and Chief Financial Officer

Leo Grepin -- President, Sun Life Asia

Stephen (Steve) C. Peacher -- President, SLC Management

Kevin Morrissey -- Senior Vice-President and Chief Actuary

Daniel R. Fishbein -- President, Sun Life Financial U.S.

Michael William Roberge -- Chairman of MFS Mclean Budden Limited & Co-CEO of MFS Investment Management

Jacques Goulet -- President, Sun Life Financial Canada

Randolph (Randy) Brown -- Chief Investment Officer

Kevin D. Strain -- President

John Aiken -- Barclays Bank PLC -- Analyst

Meny Grauman -- Scotiabank Global Banking and Markets -- Analyst

David Motemaden - -- Evercore ISI Institutional Equities -- Analyst

Gabriel Dechaine -- National Bank Financial, Inc., Research Division -- Analyst

Tom MacKinnon -- BMO Capital Markets Equity Research -- Analyst

Paul Holden -- CIBC Capital Markets, Research Division -- Analyst

Doug Young -- Desjardins Securities Inc. -- Analyst

Nigel D'Souza -- Veritas Investment Research Corporation -- Analyst

Hung-Fai Lee -- Dowling & Partners Securities -- Analyst

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