Steve Peacher: Yeah. Thanks, Tom. It’s Steve. Yeah, a few comments on the quarter relative to our run rate, which is really your question, given that the $28 million is lower than the run rate that I had indicated on the last quarter earnings call. And there were two things that impacted us. I’ll say that we think our run rate hasn’t changed, our core run rate. Two things pushed us lower this quarter than our normal that we view as our quarterly run rate. One was, as you mentioned, the mark-to-market on seed assets. So let me give some color on that. That mark-to-market related primarily to a portfolio of industrial properties at BGO that we seeded. The impact on quarterly — this quarter’s results from that was about $10 million after tax.
There was a few other items in there, but the primary driver was that the mark-to-market on that portfolio. That is a very strong portfolio of industrial properties across the US And in fact, that portfolio was marked up in the second half of last year because of meaningfully strong performance in the underlying properties. That was actually one of the factors that helped us in the fourth quarter. This quarter, we gave up a portion of those gains, and you saw valuations across industrial properties, not just in this portfolio, but kind of across the industry, fall in the first quarter as valuations reflected higher cap rates. And I think in appraiser’s view, more modest assumptions for lease rate increases going forward. But net-net, that portfolio has had a positive mark-to-market over the last 12 months.
It’s just that in the first quarter, we gave back some of the positive mark in the second half of last year. The other thing that impacted us versus our run rate this year is that we have some seasonality in compensation in the first quarter. Like many firms, we pay bonuses in the first quarter. We accrued for those bonuses throughout the year. In Q1, we paid out bonuses that were slightly higher than our accrual for the year. So that impacted us. But the bigger impact was that those bonus payments trigger related payments, such as contributions to benefit plans and that impacts Q1 proportionately. So if you adjust our results for that mark-to-market versus what we’d normally expect for seed on kind of a run rate basis and you reflect the seasonality, it gets us back to a run rate of almost that $50 million figure that I mentioned last quarter.
Tom MacKinnon: Okay. Thanks for that. And as a follow-up, MFS, there seems to be some higher expenses in the quarter two. Is there any seasonality associated with them? Are they kind of related to any extra compensation at MFS that can be volatile and may have happened in the first quarter? Thanks.
Tim Deacon: Hi, Tom, it’s Tim…
Kevin Strain: Go ahead, Tim.
Tim Deacon: Thanks for that question. There were two pieces really on the compensation cost for this quarter. There is some seasonality in the first quarter. We have shares that vest that are issued to MFS employees. And when they become retirement eligible, they immediately vest, and that always happens in the first quarter of the year. So we do get a bit of noise coming through that. But that relates to the second piece, which was the more material part in the quarter, it was really the mark-to-market gain on the appreciation of these shares that flows through as compensation expense. And you’ll recall, there’s two pieces to that. One that’s in our underlying earnings, and you can think of that as a long-term incentive plan.
And those shares are mark-to-market based on the fair value of MFS as an enterprise value. And we saw gains in the overall increase in the MFS share. So that’s flowed through its compensation costs. And then on the reported net income side, we have a component that relates to vested shares. So these are shares that have already been awarded and fully vested. We have to set up a liability for that and that gets mark-to-market through income and that flows through on the reported income side. So it’s really the two pieces. We had a share appreciation, which caused compensation costs, both in underlying net income and reported net income plus the seasonality.
Tom MacKinnon: And one of those components, maybe the second one you mentioned, is that part of that margin that you gave? I think you give a US GAAP margin as opposed to — and this might not be a US GAAP item, but it might be an IFRS item. Do I have that right?
Tim Deacon: Yeah. So the comments that I just made around the compensation, that’s all IFRS accounting. And so the margin guidance that we give is on a US GAAP basis. And so those vested shares, as an example, those flow through equity. Those don’t hit the P&L under US GAAP.
Tom MacKinnon: Okay. It would be helpful if we just have a — something that wasn’t US GAAP related, at least in IFRS 17 margin, just so we could look at that thing on an IFRS basis going forward?
Michael Roberge: And I would add, this is Mike Roberge, Tom, I would just add to that is, obviously, as we run the business and think about the business, year-over-year, US GAAP, revenues were up 5%, expenses were up 4% and pretax income was up 7%. So if you think about those things that are controllable here, and then long-term compensation just runs through. And so when you’re in a period where the stock price is going up because year-over-year, the business is driving better results. That’s going to flow through earnings. That goes the other way when the stock is going down. It’s a benefit to us. But that clearly isn’t how we’re thinking about running the business quarterly.
Tom MacKinnon: Okay. So it seems to be more accounting nuances than anything fundamental with respect to MFS? Is that the way I should be thinking about that?
Michael Roberge: Yeah, from an MFS perspective. And Tim, I’ll let you answer from yours.
Tim Deacon: No, I think that’s exactly right.
Tom MacKinnon: Okay. Appreciate that. Thanks.
Operator: Our next question is from Mario Mendonca with TD Securities. Please go ahead.
Mario Mendonca: Good morning. Can we start first in Asia? So the Sun Life’s Hong Kong sales were very strong. And I understand that Hong Kong is rather — Sun Life is strong in the broker channel in Hong Kong. So what would be helpful, perhaps for Manjit is, what did you see in the broker channel? Was there any sort of behavioral changes in the broker channel in response to the regulatory investigation? And then how did Sun Life do it? Because the message we’re getting from the domestic players and the players — like I’m saying folks, the domestic players in Hong Kong, is that this is having an effect on the broker channel. So perhaps you could speak to these investigations and what it might mean to Sun Life.
