Good morning. Well, welcome to the second day of the financial services conference. I'd like to welcome to the stage Dan Fishbein, who runs Sun Life's insurance operations, which are heavily skewed towards group benefits and then dental insurance, which will also be reflected in the questions that I'm asking today. Dan, thanks for coming to Montreal. I think it was a couple of years ago that you were also on this stage, right?
I'm not sure I've been on this stage, but I've been to Montreal a couple of times recently.
Well, thank you.
Thanks for having me.
Of course. So speaking of, well, the type of questions, let's kick off with DentaQuest. So one of the big stories over the past 3, 4 quarters was something that, frankly, I didn't know anything about, was these redeterminations and some business was lost. But it looks like we're, you know, we have a lot more visibility on that business being backfilled, given the sales that have been reported, you know, since your trough period. And what I'd like to get into, not too technical, but what's involved in the sales process so we can get more familiar with how this business works. And also, what did Sun Life bring to the mix in terms of possibly improving DentaQuest's sales performance?
Okay. Yeah. As with anything in the U.S., it could probably take the entire remaining 23 minutes to explain all the different parts of this.
Sure.
So, I'll try to do it really quickly. So, DentaQuest is a business that we acquired in the U.S. almost two years ago. They were very heavily focused on government programs, which is mostly Medicaid, the program for low-income people, and to some degree, Medicare, which is the government program at a federal level for people over 65. But they also had a commercial dental business, and Sun Life had a commercial dental business. And by commercial, what I mean is an employee benefits business where people get that benefit through their workplace.
So putting those two businesses together has had a lot of interesting advantages. First of all, by the way, just putting the provider networks, because that's a critical component of these businesses, putting that together has had some big advantages. But the sales process, there's actually multiple different sales processes.
Selling government programs is completely different than selling in the employer market.
Right.
Government programs are few, but very large. So there's a whole very well-developed process at DentaQuest for going after these very large government contracts, a whole proposal team that studies these months, even years in advance, and strategizes out how to win. Where Sun Life has added something to that is through the provider network.
Right.
That's been very, very helpful. On the commercial side, Sun Life actually had more commercial business than DentaQuest had, but there's also been some very valuable advantages there. We took the proposal team that's good at going after these large government contracts and put them to work on going after large commercial contracts. We had a really big early win last year. We won the mandate to cover all the employees of the State of West Virginia, one of the biggest employee benefits dental business contracts we've ever won. That was a true collaborative effort of their pro large-case proposal team and our sales team that works very well with brokers, which is the distribution mechanism for employee benefits. Both organizations have added something to that sales process that wasn't there before.
The provider network, you're saying that was enhanced by DentaQuest or by Sun Life?
Well, both, but.
Yeah.
Very much by Sun Life. Because what DentaQuest did in focusing on government programs, which are very generally very state-specific, is they would build a network in that state.
Right.
But then they would sometimes have to do that on a pro forma basis when they were going for a contract. Sun Life has a nationwide dental provider network that's quite robust in size. And so we've been able to recontract that network as needed for government programs, which really accelerates the process of getting into a new state.
Just a kind of simple illustration of that, so if you're pitching to a state previously, DentaQuest might have had a smaller list of providers, and then when Sun Life is in the mix, you're like, "Okay. You if your people can have coverage everywhere in the U.S." And it's a lot it's a better offering, essentially.
So certainly everywhere in the U.S., and also DentaQuest might not have even had a network in that state.
Okay.
You know, for example, they won the state contract in Iowa last year. What they typically would have done pre-Sun Life is go out and precontract with some dentists and then present to the state of Iowa, "Here's our plan for building the network once you award us the contract.
Okay.
But that's a much more compelling case now to go to Iowa and say, "Well, through the Sun Life network, we already have, you know, X thousands of providers under contract. We can recontract them specifically for Medicaid terms, but we're not starting that work from scratch.
And then the private market, or what do you call it, the commercial, or that was a much smaller component of DentaQuest. Is it, you know, reasonable to assume that there was a bigger, you know, growth outlook for that part of the business? Because you might have some overlapping clients that don't they have Sun Life on the group benefits side, not the dental side, and maybe just simply more of an emphasis on that channel.
Well, I think there's growth in multiple segments. More than 80% of the DentaQuest business was in Medicaid.
Right.
So, and there's still more growth. Like, they won four states last year. But Medicare, by the way, is also a big growth opportunity. I think DentaQuest is really just in the early stages there. What's very attractive about the commercial market and growing more rapidly there is that each commercial member represents, depending on the benefits, three to five times the premium that a Medicaid member represents.
Right.
So, Medicaid, they have vast, vast numbers, 30 million or more, Medicaid members. But we anticipate commercial will be a big part of the growth story going forward. It doesn't take as big numbers, but if you get 3-5 times the premium, you can get some really good revenue leverage there.
So the revenue, you know, per covered is higher. What about the margins? Are they? How do they compare between the Medicaid and the private market?
They're probably a little bit higher in commercial. One thing about dental is margins are pretty small, but the ROE is very big.
Okay.
So the denominator, the numerator is smaller, but the denominator is much smaller.
'Cause there's no claims reserves and.
There's not. Well, there's some claim reserves. But generally, in a dental benefit, you're talking about a few thousand dollars a year in benefits. So the actuarial formulas don't require us to keep a ton of capital around that business. So the denominator's very low, and the ROE is really good in that business.
So, what could go wrong in dental? I know, I think—I mean, I know employee benefits, if unemployment goes up, long-term disability claims can go up. Or if, if you were to simply do competitive in your pricing and, and claim volumes exceed your, your assumptions, that's when you can have a period of, you know, negative growth. What's the, you know, analogous risk, I guess, in dental?
Well, the first thing that can go wrong, which has never happened before, is the government can decide to disenroll a significant number of the members, which is what's happening right now.
Right.
What happened in the U.S. is there was what was called the Public Health Emergency around COVID. That was ended in May of last year. The states, for the first time in more than three years, were free to disenroll people who might no longer have been eligible. So there's a pretty significant reset going on. That's a one-time thing. Well, the business will rebase at a different size and then grow from there. You know, there, there's always new innovation in medicine, including in dentistry, but it's not the same as in medicine. You know, we don't have a $3 million dental drug.
Right, right.
Coming to market. So we obviously watch very carefully all the trends in dental care. We know what the underlying medical cost inflation is for dental. We have good both internal data and external sources for that, and we can price for that. In the government programs business, a lot of those arrangements have corridors. We're at risk within a corridor, but there's a minimum and a maximum. So in a sense, we're sharing risk with the state. So there's a lot of protection there, actually. Things happen within that very narrow corridor, but that means you can't have a huge amount of volatility. So dental is actually a much more stable business, from a margin perspective than medical is. And it's actually all about scale.
It becomes, you know, it's a growth story in how much scale can you apply to that business and drive expense efficiencies more so than it is, you know, a big risk management function.
So you mentioned one of the risks of group benefits or medical coverage. And there's no $3 million drugs in dental. Well, there are $3 million drugs in medical coverage. Is there anything going on on that front at the moment? I mean, I don't think Ozempic is of that nature, but it's certainly topical as far as you know everybody's using it these days, it seems. And I don't know if you provide that coverage.
Well, a couple of things there. So first of all, on the, you know, the so-called GLP-1 drugs, of which Ozempic is the most common, Stop Loss, which is one of our three big businesses, one of the businesses where we're a leader, is a little bit at a different part of the medical continuum. What Stop Loss insurance is, is about two-thirds of the people in the U.S. who get their health insurance through work are actually in a plan that has no insurance coverage. The employer is self-funding it, and they just hire an administrator to run that for them. But many of those employers buy what's called Stop Loss insurance, which protects them if any one person in a year has a very significant amount of claims. So they set the deductible for that.
It's typically something like $200,000-$250,000 a year, and then we reimburse them for the amounts over that. So Ozempic doesn't rise that level. I looked it up last night. Ozempic is $936 a month.
Oh, cool.
So about 11,000 a year. So it's not gonna get to those kinds of stop-loss thresholds. But, you know, in the longer term, while we don't really yet know what Ozempic is going to do for people in the long term, including what the side effects are, but more and more, you're seeing articles saying that it's possible that obesity as a condition has been cured. And that could have profound impacts on other parts of medical care. You know, would that mean less diabetes, less heart disease?
Right.
All sorts of incredible things like that. Now, I'd say that could help Stop-Loss in the long run. Or really, what it would mean is, obviously, the pricing would match a lower risk, but that would be, you know, certainly, great news. I did see a study recently that said if everybody in the U.S. who could technically qualify for Ozempic was taking it, it would cost $1 trillion a year. And that the medical benefit would be $200 billion-$300 billion. So obviously, there's even at the $936 a month, there's something wrong with the pricing.
Yeah, yeah.
Of Ozempic. Because right now, the way drug pricing works is they take what they invested to develop the drug, and then they try to recover it and some profit margin on the number of people who are likely to take it. But if that ballooned to that many people, then that would obviously not be the right price, and I'm sure the government would step in in some way. Now, you mentioned in and I mentioned as well, the $2 million-$3 million drugs. That's a much bigger, more relevant, issue for the Stop-Loss business because that would certainly, you know, come under Stop-Loss coverage.
So we've had, you know, a very extensive effort going on for several years right now to make sure we're aware of new drugs as they come to market that are in that range and figure out how to cover them, how to price for them. The good news is we have a very large book of business. We have over $2.5 billion of Stop Loss, so we can pay some large claims. It's not you know, it's you know, it's kind of why we're here, why we provide that coverage. However, and this is kind of a little understood fact. When the U.S. passed the so-called Obamacare or the Affordable Care Act, one of the things that happened was lifetime and annual maximums in health plans were made illegal.
That was probably the right thing to do because health insurance is there to cover you in the, you know, the more significant situations. That coverage shouldn't just stop. But what happened was that created a market for these kinds of drugs that never existed before. You know, in the past, a scientist would go to a drug company and say, "I've got this great idea. We can come up with this drug. It'll be useful for 1,000 people a year, and we only have to charge $3 million a year for the drug." Now, a lot of health plans had a $1 million annual benefits cap. So then in the pharmaceutical company, seeing that business case, would say, "We can't do that. It's not gonna be reimbursed." Now it is reimbursed.
As a result, there is a huge pipeline of these $2 million and $3 million drugs that are about to come to market 'cause it takes a little, it takes 10 years to develop, test, get approval. This is going to become a very big issue going forward.
What disease are they trying to address with these drugs, or is there?
In a huge variety of illnesses. Many of them are now in the category of what's called gene therapy. So these are, you know, inherited, very serious but relatively rare conditions. But with gene therapy, you can actually cure a lot of these conditions. You can actually change the person's DNA so that they no longer have that condition.
Okay. Well, sticking to the Stop-Loss theme, the results have been pretty good. And in the past, we've talked about, you know, this latent impact of COVID where people didn't do—I mean, the medical coverage—and then you've got a period where claims just spike because they didn't catch something in time. Is that still something that we need to be concerned about?
Well, so, what's happened with Stop-Loss through the pandemic is in the first year or two, we and everyone else in the industry had, you know, unusually good experience because people just weren't going to get care.
Mm-hmm.
That ended, obviously, quite a while ago. But what happened was during COVID, a lot of medical practitioners in the U.S., doctors and nurses in particular, retired early. A lot of people in that 50-65 cohort left the field. And of course, that's an outsized cohort because of the baby boom.
Yeah.
generation. So we ended up with a shortage of supply, not a shortage of demand. The demand recovered pretty quickly within a year or so, but the ability to fulfill that demand was very much constrained. So everyone, you know, health insurers, Stop-Loss insurers, continued to have better-than-expected experience because there simply wasn't the ability to provide the care. Over the last six months or so, we've seen the capacity in the system get back to where it was. That was obviously a multi-year effort of hospitals to hire more people, schools to train more people, bring more people into the professions. So now, with the supply recovering, the utilization has recovered as well. So in our Stop-Loss business, for example, we were seeing experience or loss ratios significantly below what we priced for. Inevitably, that has to go back to where it was.
You know, we saw that trend start, second half of last year. You know, clearly, capacity is now back to where it was.
And another – I mean, disability claims, incidents, and severity – was also a period of, you know, very much lower than you would have assumed. And that's pretty much over now, I guess, the?
No, actually, we're seeing.
It's like, it's hard 'cause we see one number in your results, and it's hard to decipher what, you know, how much is Canada versus the U.S. So just a little refresher, I guess, on.
Yeah, yeah. And, you know, just an editorial comment. In the SOE, when you see positive experience or negative experience, that's not really positive or negative. That simply refers to better or worse than expected.
Right.
So you could expect terrible experience and have it be slightly, you know, less terrible, and it would be reported as positive. So.
Yeah.
It gets a little, you know, those, those words have value judgments associated with them, but they don't mean exactly what they appear to mean. But in any case, what we saw throughout COVID was pretty, you know, average to a little better-than-average disability experience. Last year, everyone in the industry started to see significantly better disability experience. I wouldn't say dramatically, but it's actually more recent that the experience has been favorable. And it's not, to be honest, it's not entirely clear why.
Mm-hmm.
But one theory would be there's fear of layoffs. So when there haven't really been a lot of layoffs, but there have been some that hit the news, tech companies, and so forth. When people fear layoffs, they tend to; they're less likely to file for disability insurance. So we are definitely seeing favorable experience, you know, the whole industry has for the past Q4 or Q5 .
Well, tech people wouldn't get disability claims too often anyway, right? Carpal Tunnel, you know?
Well, you know, it's a really good, well, but you bring up another very important point. One reason why disability experience may be more favorable is for the roughly half of the economy that can work from home. There's new options now other than just going out on disability. Somebody has an illness or a physical condition that previously would might have kept them from getting in the car and going to work, they can now work from home. And the ability to get people back to work or partially back to work has gotten much better in this new world.
So Stop Loss still doing well, dental improving, the disability coverage also doing well. Like, what sort of pricing actions have you been taking that going into this year? It wouldn't, wouldn't suggest that you needed to reprice much higher, maybe, other than coverage, costs are higher, but, maybe you can clarify that.
Yeah. So I think, you know, in terms of there are two resets going on, right? Dental, the latest external estimates are that the states have disenrolled 18% or will have disenrolled 18%-19% of their Medicaid members. So that's a reset. That also changes the mix of the business. A lot of the members that are being disenrolled were not high utilizers, maybe not utilizing at all. So we've gotta get through that reset. Same thing, Stop-Loss, obviously, utilization going back up because supply is back up. So, you know, it to your question, though, what kind of pricing increases? All of the businesses always have an inherent trend in them in some pricing increases. And obviously, I'm not gonna give you, you know, what our pricing is.
But in Stop-Loss, we generally have seen over the years, medical trend medical inflation in the U.S. is 6%-8%. So that drives a growth in the business even without doing anything. And then we are taking share, by the way. What we are seeing right now is with loss ratios recovering, the pricing is getting more rational. It has tended to be a very cyclical business. Some players will price very aggressively when the loss ratios are good, saying, "Hey, that's great business. Let's get more of it." Then they overdo it. Their loss ratios go up. They say, "Ooh, we don't like this business. We better put through big price increases to get it back to where it needs to be." We've never done that. We've been a much more stable pricer than most of our competitors.
But at the moment, we are seeing a somewhat more rational pricing environment in Stop-Loss. So we've been able to get the increases that we think are appropriate. In dental, there is low single-digit medical inflation or dental inflation. That's certainly part of it. One of the big issues for us is the state contracts generally reprice every year, but we've gotta go back to the states and say, "You have now delivered to us a completely different mix of membership." A ll the low utilizers were disenrolled. The higher utilizers stayed. You have to adjust your pricing to reflect that.
But that takes some time. We have to go through a full pricing cycle to do that. But we are seeing and anticipating getting appropriate increases to reflect that risk. And then in the group business, life, disability, there's generally you see low single-digit increases.
It tends to track with the size of the economy if, you know, a lot of the benefits are related to income. So if incomes go up.
Yeah.
Prices go up. Generally, we're seeing a pretty reasonable pricing environment there as well.
And quickly on investments, I don't know what you can, you know, if there are any major investment initiatives taking place, other than integrating DentaQuest. That's a big one. But, are there any big tech overhauls that you're pursuing right now?
Well, we tend to avoid big tech overhauls because we think very, those are super risky. So we do sit on top of a set of legacy systems. So I think the whole tech world has matured to the level where it understands that we build on top of those legacy systems as opposed to scrapping them and starting all over. But that's actually been our biggest and most important investment is in our group business. That's the disability, life, absence management, voluntary. We've invested quite a bit in enabling our employer clients to integrate with the rest of the benefits ecosystem. We've invested heavily in things like APIs that allow data to move back and forth in a smooth way and integrations with benefit enrollment firms and benefit administrators.
We're actually probably one of two companies that's done the most in that area, and it's providing real differentiation for us. The last two years, our business our group business has grown at double digits. That's a business that hadn't been growing for a long time. We're definitely taking share, with those capabilities.
I'd wanna wrap up on M&A. If I go back over the, you know, history of Sun Life in the U.S., the Genworth group business 10, 15 years ago, there was Assurant, DentaQuest, and I'm sure I'm missing another along the way. The message from the company was a lot of these acquisitions and that the smaller tech-oriented ones were to fill in gaps and increase capabilities. It seems like you've got all your bases covered now. So the case for future M&A isn't as strong as it has been in the past. What's your perspective?
Well, we're always active in looking at what's out there, and there's always things. We like the three active businesses we're in, so the Stop-Loss business, which we call Health and Risk Solutions, the group business, and the dental business. We wanna be a leader in each of those businesses. So we're not necessarily looking for a fourth business. By the way, we've grown that over the past 10 years. The employee benefits business has grown from $2 billion of revenue to over $8 billion. A big part of that has been an M&A program, but, and there's also been a lot of organic growth. So where we would look would be for capabilities or scale that could help us in those any one of those three businesses.
We're not necessarily done, but we're also not looking for some massive acquisition or for a new unrelated business area.
Got it. Okay. Dan, great talking to you as always. Thanks for coming to Montreal.
Thanks for having me.