Q3 2019 Earnings Call
Good morning, Ladies and gentlemen, my name is Chris and I will be your conference operator today.
At this time I would like to welcome everyone to the Sun Life Financial Q3, 2019 financial results Conference call.
All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question answer session.
The host of the call is leach almost senior Vice President head of Investor Relations and capital Management. Please go ahead mr. almost.
Thank you, Chris and good morning, everyone welcome to Sun Life Financial earnings Conference call for the third quarter of 2019, our earnings release shareholders report and the slides for today's call are available on the Investor Relations section of our web site at Sun life Dot Com.
We will begin today's presentation with an overview of our third quarter results by Dean Connor, President and Chief Executive Officer of Sun Life financial.
Oh wing Deans remarks, Kevin strain executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After their prepared remarks, we moved to the question and answer portion of the call.
Other minted members of management will also be available to answer your question on today's call.
Turning to slide two I draw your attention to the cautionary language regarding use of forward looking statement and non I have for financial measures, which form part of today's remarks.
As noted in the slide forward looking statement, maybe rendered inaccurate I subsequent of it.
With that I will now turn things over to Dean Thanks, Lee and good morning, everyone turning to slide four in Q3, we delivered another quarter of growth with reported net income of 681 million and underlying net income of 809 million reported net income increased by 20% over the prior.
A year on an underlying net income basis EPS of $1.37 grew 14% from the prior year, excluding the resolution of certain tax matters from previous years EPS grew 3% from the prior year, we generated an underlying our or we have 15.5% for the quarter.
Reflecting higher underlying net income as well as the equity impact from completion of the Ben told Reno transaction as previously announced.
Assets under management grew to 1.1 trillion dollars this quarter, an increase of 8% over the prior year.
The strong capital ratio of 146% at SLF, Inc. and a financial leverage ratio of 22.8%. We can continue to support organic gross deliver a stronger or we maintain the flexibility to support acquisition opportunities across our four pillars and return excess capital to our shares.
Holders through buybacks and dividends.
Yesterday, we announced a 5% dividend increase resulting in year to date increases of 10% inline with the upper end of our medium term objective range for underlying EPS growth.
Our asset management pillar delivered strong growth this quarter with gross sales up 41% across MFS and SLC management. Overall, we had net inflows of 3.2 billion, including you asked 1.3 billion up net inflows at MFS driven by a third straight quarter of strong gross and.
Net retail flows the retail results are consistent with our thesis that notwithstanding the shift to passive there will continue to be alpha seeking alpha, believing investors, but that they will consolidate assets in the hands of fewer active managers and we think MFS is one of them.
MFS assets under management increased over the quarter to U.S. 495 billion.
Reflecting net inflows and strong investment results, 92%, 93% and 94% of MFS is U.S. retail fund assets were in the top half of their lipper categories based on 10, five and three year performance respectively.
We've also continued to build out our fixed income capabilities as micro bears described at Investor day over.
Over the past year fixed income a U.M. has grown 11% driven by a 55% increase in institutional fixed income sales and a 35% increase in retail fixed income sales both on a year to date basis.
And that's healthy management, we closed on the acquisition of a majority stake in Bentall Green Oak this quarter, which broadens our global real estate capabilities, adding 12.6 billion of real estate a U M to all our alternative investment business. This along with strong net inflows of 1.5 billion grew 80 AUM to 83.
Billion at SLC management.
Turning to Asia, we delivered strong topline growth in insurance and wealth.
We grew insurance sales in Asia by 45% at constant currency with particularly strong growth in Hong Kong were sales more than doubled from last year.
These results were driven by growth in our agency force by growth in third party distribution and the launch of new products.
We grew wealth sales in Asia by 31% in constant currency led by 27% growth in our Hong Kong mandatory Provident fund pension business, where we rank number four based on a U M.
True to our clients strategy and the focus on digital this past quarter, we launched the Sun access App in Malaysia, completing the rollout of mobile apps for clients across all seven of our local markets in the region.
Moving to Canada insurance sales were flat and wealth sales were up 17% compared to the prior year driven by our group retirement services business.
Sunlight global investments generated mutual fund net flows of 494 million in the quarter and AIU EM grew 16% over prior year to reach 27 billion.
We also experienced higher disability claims and slower returned to work in our group benefits business and Chaco lay and his team have initiated a series of actions to address this.
We continued to invest in growth and innovation in Canada. For example, we introduced three new technologies to help deal with mental health a.
Pharmacogenomic intervention to identify the best treatment for depression.
Virtual independent medical exam and online cognitive behavioral therapy.
We also rolled out new features in our industry, leading my Sun life client up which now has over 1 million active users across Canada up 37% over the prior year.
We continue to see strong expense management in Canada, which means both investing and initiatives that will drive our continued future growth, while managing expense growth to just 2% year over year.
In the U.S., our after tax profit margin in group benefits was 7.2% in the third quarter on a trailing 12 month basis business growth continued with a 43% increase in our medical stop loss sales, which contributed to 9% overall growth of our U.S. group benefits business in force compare.
And to the prior year, we're seeing good progress with the rollout of our Sun life, plus Maxwell health benefits platform to clients in the us to date employers on the platform are selecting nearly three times as many sunlight products compared to our typical employers.
By continuing to help close the coverage gap in the U.S. Sun life, plus Maxwell Health is another example, where we're leveraging digital data and analytics to deliver on our purpose of helping clients achieve lifetime financial security and live healthier lives.
The company overall, we grew insurance sales by 19% and wealth sales by 38% in the quarter compared to the same period last year and value of new business was up 3%, reflecting changes in sales mix methodology changes and the impact of lower interest rates.
Overall, I'm pleased with our progress on building better experiences for clients. The investments, we're making a digital solutions are touching more and more people and creating differentiated experiences the investments, we're making and data analytics and robotic process automation are paying off and the step change around client obsession putting clients at the center.
Sure of everything we do is in full swing.
Before I turn the call over to Kevin strain I'd like to take a few minutes to recognize some changes in our executive team.
Few months ago, we announced the clawed back them President of sunlight Asia, and Kevin Dougherty Executive Vice President of innovation and partnerships will be retiring at the end of this year after long and successful careers at Sun life.
Lots been with sunlight for 36 years and has led a number of our businesses in key functions for the past two and a half years. He's led our Asia operations and under his leadership, we've seen increased market share and growth in the region, adding 16000 advisers and millions of new clients. We've also improved the client experience through digital.
Nation and new partnerships.
And already is retiring after 25 years with Sun life.
Prior to leading innovation and partnerships Kevin was the president of Sun Life, Canada, and under Kevin's leadership, Canada grew to the number one market positions in group benefits in group retirement services and individual insurance sales.
Also built new businesses, including sunlight global investments and champion innovations, including total rewards our industry, leading mobile app, our digital coach Ella and digital health solutions. So a warm thank you to Claude and Kevin for the very positive impacts they've had on Sun life, and we wish them all the best as they enter a new and exciting.
Phase of their lives.
I'd also like to welcome Leo graph into the executive team. Leo currently serves as our as the and President and will succeed Claude as President of Asia starting in January .
Moving to Asia, Leo led our individual insurance and wealth business in Canada, and with that I'll now turn the call over to Kevin strain, who will take us through the financials.
Thanks, Steve and good morning, everyone turning to slide six we take a look at the financial results from the third quarter of 2019, we delivered growth in reported an underlying net income. This quarter ended reported an underwriting return on equity underlying our we was 15.5% above our medium term objective of 12% to 14% the net.
Impact from our third quarter actual methods and assumption review was neutral to earnings on an after tax basis I will discuss our actual assumption changes in my comments on the sources of earnings.
Underlying net income was 809 million up from $730 million in the prior year translating into earnings per share of 14%. This quarter's results included favorable impacts from the resolution of tax matters from prior years, including interest related to the resolution as well as an investment income tax allocation update between the pro.
Just maybe Paul Paul who was account and shareholders retail altogether. These drove a favorable impact of $78 million in the quarter with $58 million in the corporate segment and $20 million in Canada.
Underline that income was also reflected continued growth in the business favorable credit experience again from a mortgage investment prepayment in the U.S. and higher cost gains than prior year. This was offset by unfavorable mortality morbidity and count on us and lower investing activity gains.
We continue to maintain a strong capital position with a light cat ratio of 146% for Sun life financial Inc. and 133% for Sun Life Insurance company of Canada.
I'd like to take a minute to discuss our lightest since sensitivities. This quarter you will notice our sensitivities for escalate are behaving differently than they have in the past generally the light cat racial will decrease with raising interest rate and increase with declining interest rates.
Over this quarter sensitivity, so why can't reducing in both a rising or declining interest rate environment.
As a result of the continued decline in interest rates during the quarter, we move closer to a switch in the interest rate scenario for escalate applied in the like how formula the like Formula for interest rate risk uses the most adverse of poor different interest rate scenario and when you move from one scenario to another it can create just continuity and results.
On a net net basis, if interest rates were declined by a further 50 basis points from where the ended the third quarter, our light cat ratio would reduce by 3.5 point well increase in interest rates of 50 basis points was a 2.5 point decrease in the light ratio.
Turning back to third quarter results, our cash position of $2.8 billion at the holding company is up from the prior year, mainly as a result of the issuance of a 750 million dollar sustainability bond in August .
The issuance contribute to the increase in our financial leverage ratio this quarter, along with the equity impact from Bentall Green, Okay acquisition.
Our leverage ratio was 22.8%.
At 22.8% remains below our long term target of 25%.
We saw growth in our book value per share this quarter up 4% over the prior year, reflecting income growth over the past 12 months and the impact of accumulated other comprehensive income partially offset by the payment of common share dividend and the impact to the Bentall Greenville composition.
The Bentall Greenock acquisition reduced book value per share by $1.49.
Excluding the acquisition impact of equity book value per share up 9% year over year.
In the third quarter of 2019.
We repurchased approximately 3.6 million common shares.
Were $192 million and year to date, we've repurchased approximately 11.4 million common shares for a total of $590 million.
As Steve noted earlier yesterday, we also announced the 5% increase from our common share dividend to 55 cents per share, reflecting our earnings growth and strong capital position.
Turning to slide seven we provide details of underlying reported net income by business group for the quarter in Canada underlying net income of $260 million was up from the third quarter of 2018, including $20 million from favorable impact of tax matters from the prior years, which I noted earlier kind of underlying net income also included favorable.
Pack from the growth of the business higher available for sale gain and favorable expense experience. This was offset by unfavorable morbidity and lower new business gains.
In the U.S. underlying net income was relatively in line with the prior year as favorable expense experience continued business growth and a gain on mortgage investment repayments were offset by unfavorable morbidity experience and stop loss as well as lower investing activity and lower FX gains.
Our group benefits after tax profit margin. The U.S. was 7.2% on a trailing 12 month basis in the third quarter compared to 6.4% on a trailing 12 month basis in the prior year. This reflects continued strong results in our stop loss business and higher margins in the employee benefits business.
Asset management underlying net income of $251 million was consistent with the prior year, reflecting a consistent level of average net assets and MFS and the impact of foreign exchange.
The pre tax net operating profit margin for MFS was 40% also consistent with the prior year.
Underlying net income as SLC management was $6 million lower than prior year as result of the timing of certain fee income as well as higher expenses.
In Asia underlying net income was up 25% from the prior year, reflecting higher FX gains.
Liberal credit experience and continued business growth.
Turning to slide eight we continue we provide details on our sources of earnings presentation.
Expected profit of $816 billion was up $28 million were 4% from the same period last year.
Good in the impact of currency and the result of the asset management businesses expected profit grew 7% over the prior year in particular, Canada saw 11% growth and expect to profit while the U.S saw 8% growth.
We had new business stream this quarter of $22 million, which was higher than strain of $8 million in the prior year.
This mainly reflected lower new business gains in individual insurance business in Canada, primarily as result of lower interest rates.
Experienced losses of $86 million pre tax for the quarter reflected net unfavorable market impacts of $88 million driven by interest rate movements in the quarter and lower mark to market gains on investment properties, partially offset by equity market gains.
Positive experience from credit mortality investing activity and expenses was mostly offset by the unfavorable impacts of morbidity policyholder behavior and other experience.
Our third quarter in view of assumption changes in management actions or Acma included some large and offsetting items, resulting in a net neutral impact on an after tax pieces.
This year's review included positive updates to mortality assumptions in the UK and our group retirement services business in Canada based on industry data and our own experience offsetting these items were updates to lapse and other policyholder behavior experience, primarily in our international business and other enhancements and methodology changes the largest.
Our UNFI were unfavorable updates reinsurance assumptions related to enforce management in the U.S.
This quarter, we also have to the ultimate reinvestment rate assumption to the new promulgated rates issued by the actual standard sport, which resulted in a charge of $93 million inline with our disclosed estimate of $100 million.
Other in our sources of earnings which amounted to a loss of $50 million included the fair value adjustment of MFS share based payment award acquisitions integration and other restructure costs and the impact of certain hedges in Canada that do not qualify for hedge accounting.
Earnings on surplus was $137. This was $18 million higher than the third quarter of last year, reflecting higher MFS gains, partially offset by lower investment income.
Our effective tax rate on underlying income for the quarter was 9.2%, which is below our expected range of 15% to 20%, mainly driven by the favorable favorable resolution of premium tax matter.
Slide nine so sales results across our insurance and wealth businesses total company insurance sales of $685 million up 19% or 18% on a constant currency basis compared to the third quarter of 2018.
Ken insurance sales were in line with the prior year, reflecting slightly lower individual insurance sales offset by higher group benefits fails.
Insurance sales in Asia were up 45% on a constant currency basis with strong growth in six of our seven local markets as well as growth in international International sales grew 14% driven by the new par product. We launched in May of this year as well as an uptick in universal life sales.
In the U.S. insurance sales were up 5% in the constant currency basis, largely driven by continued growth in our medical stop loss stop loss business, which grew by 43% compared to the third quarter of 2018.
Total company wealth sales of $41 billion were up 30% from the prior year or 37% on a constant currency basis.
In Canada the increase in wealth sales was driven by our group retirement services business, which grew by 29% compared to Q3 2018.
Between MFS and SLC management asset management gross sales increased 40% on a constant currency basis.
MFS grew 48% on increased institutional sales and record high retail sales.
SLC sales increased 76% as we continued to execute well on growth in our alternative asset management space, where AUM grew to $83 billion, reflecting.
Net inflows and the Bentall Greenock transaction.
In Asia wealth sales were up 31% in constant currency, we saw an increase in money market sales in the Philippines as well as nearly 30% increase sales in our pensions business in Hong Kong. This was partially offset by lower mutual fund sales in India, primarily driven by weaker market sentiment and volatility.
Five new business of $252 million was up 3% year over year, largely due to growth from higher sales, partially offset by changes in the sales mix and the impact of lower interest rates.
Turning to slide 10, we provide a view on expenses operating expenses were up 4% in a constant currency on a year to date basis, when removing the impact of acquisitions, primarily related to the mental Greenock acquisition operating expenses grew 3%. This growth is mainly driven by controllable expense growth of 3%.
Reflecting growth and investments in our businesses.
And our experience related items, we had an expense gain of $3 million after tax.
Include we delivered strong sales growth in the third quarter strong underlying our two under underlying our we and underlying EPS growth of 14%, we increased our dividend to shareholders by 5%, representing a 10% increase on a year to date basis, our capital ratios remain strong we continue to hold significant excess cash.
Capital, providing us with good flexibility into the future with that I'll turn the call to lead to begin the Q and a portion of the call.
Thank you Kevin to help ensure that all our participants have an opportunity to ask questions on today's call I would ask each of you to please limit yourself to one or two question and then to re queue with any additional question.
With that I will allow us Chris please pull the participants for question.
Thank you at this time I would like to remind everyone in order to ask a question press star is on the number one on your telephone keypad.
Your first question comes from Humphrey Lee of Dowling <unk> partners. Your line is open.
Good morning, Thanks for taking my questions.
A question about MFS flows, which definitely well we're very very good. This quarter I was just wondering if you can talk about some of the driving force for the strong retail flows as well as the improvement in institutional flows and then also if you can comment on the outlook for floating in the near term.
Hey, good morning, Humphrey, It's Michael Bearish.
What we've seen over last several quarters is pretty good underlying trends in retail flows, particularly.
In the U.S. market.
If you look across most of our largest distributors sales are up year on year I.
I think the backdrop associated with that us equity mutual funds.
Alright outflows this year and yet we are in net inflows with a fair majority of that being in equities. So it appears that we're gaining shelf space on many of the platforms that were on so we feel pretty comfortable with the trends that we're seeing on the retail side.
The institutional side.
Very lumpy in terms of what we see from an activity perspective with the equity market, making new highs. We do continue to see de risking happen. So as equity is rising and DB plans will de risking move from equities into fixed income so to the extent the equity markets continue to stay where they are we would expect to see more of that so I think is.
I think about flows on a go forward basis, we feel pretty comfortable with what we're seeing on the retail side and it's really hard to know when the institutional side.
Okay I appreciate the color.
And then shifting gears to Asia sales again was very good this quarter.
I think this has been a while since you see this level sales growth do you think the current pace is sustainable in the near term or is there anything that is kind of one off due to product changes I things like that that drove the really strong performance in the quarter.
Thank you Humphrey clot academia contribution actually came across the board.
For most of all local markets and we also saw a nice rebound and international to give you a flavor, but maybe I can just to give you a sense of what the three biggest slips work. So one of the biggest lifts was in the Hong Kong sales.
Which were up 100% and I believe that set of resilience and robust and continues we had strong sales in both agency and broker on agency. We had some strong products a voluntary health insurance gain a qualified deferred annuity policy at the ease are driven by tax incentives.
By the government Hong Kong and that.
Continues.
In China, we saw sales up.
As significantly as we built out a relationship with a new online platform and that arm to 40% of sales and so as we work with that part in our into these pilots and that could continue and then international we saw a 20% growth in sales from prior year and that was driven by.
Rebound in your wealth sales driven by a short rates dropping that continues as long as prana financing rates are lower we could still continue to see strengthen those sales and we also had sales campaigns in international has that will continue so to the ended the year.
So I think there's some durability to that.
Got it thank you and congratulations on your pending retirement.
Thank you very much.
Your next question comes from Steve Theriault, Okay to capital your line is open.
Thanks, very much a first question on the reserve changes, it's the second no a net neutral but this is the second quarter. We've seen the enforce management business have a significant reserve strengthening can we get a bit of a refresh share and any sort of optimism around.
A second strengthening will that get experienced in better shape or any comments on profitability going forward.
Yes. Thanks for the question Steve This is Kevin Mercy. So this year is quite different from last year I think last year, you referred to the strengthening and reinforce that was related to lapse and policyholder behavior. So we took quite a quite a significant strengthening last year. As you will probably have observed that was quite successful and our experience.
Yes.
Has been quite favorable and close to zero.
Since then so thats right in line with what we had expected from that reserve strengthening so thats worked out as a boat as well as you could have expected. So we're not looking at anything further on that front. This year's change was related predominantly to reinsurance. So we looked at strengthening of our risk provisions in reinsurance.
One of the update was related to Scottish free and the receivership with state of Delaware.
We also did more broad review of all our risk provisions of all our existing enforce treaties I would say that that review was quite comprehensive and we're comfortable with where we have landed and are not expecting any further changes on that front.
Okay. Thanks for that and second a second second question Dean it's been almost two years since you've had in our we below the midpoint of your target range.
So I guess at what point do you think about reconsidering that range, especially given the substantial excess capital you have in that we all expect to be to put to use overtime.
Yes, thanks, Steve fit so dean.
You're right to call out I mean are are we underlying our are we year to date at 14.1% is just to tick over the top end of the range the 12% to 14% medium term objective range that we've put out there I mean, I'd say that these are medium term objectives, we do review them.
From time to time, they are meant to demented to last for some period of time and I think thats consistent with the way other financial institutions approach them, you don't see them being changed.
On a yearly basis at all so it's something we'll keep looking at.
I think.
We feel good about that are we think were.
And you're right to point out that we're generating that with with excess capital on the balance sheet.
At the same time, and it's something that will be coming back to probably next year.
Okay next year in terms of leading into Q4.
Or next year I'm, a little bit late in the year I'm not sure if you've got a investor day plan or not next year.
We don't have an investor day planned, but we don't need an investor day. If we can always we don't we're always looking at the medium term objectives, we don't need an investor day to if we decide to update them, we don't need to circle that around or center that around and Investor day.
Fair enough. Thank you.
Your next question comes from Meny Grauman of Cormark Securities. Your line is open.
Hi, Good morning question on the Q3 assumption review.
One of the details if I look at a investment returns I'm seeing more than a the you are our charge more than being offset I'm just wondering what.
That offset is being driven by.
Thanks, Randy this is Kevin Morrissey.
You're right.
The total investment changes were slightly positive.
For the year and we did take that 93 million you are charged largely in Canada.
We saw positives related to investment strategy reviews in a number of different geographies.
We also had a reduction in some of the risk provisions for reinvestment risks on variable Universal life policies in Asia.
Putting all those together we ended up with a small positive in that category.
Thanks for that and and then Mike.
Appreciate the color you've given maybe just a little bit more detail on some of the dynamics you're seeing on the retail side in terms of flows and really the the battle between passive and active and I think in the past you've talked about how.
No you laid out a scenario where in a down market to be would have.
An opportunity to see active outperform passive I'm wondering just given given the current market dynamics.
What's really going on here on the retail side Theres, a real change in terms of investors perceptions of active versus passive and and and value versus momentum.
Yes, many I think.
Clearly, we continue to see the trend out of active products in equities into passive products at a rate that slower than what we saw several years back.
And it looks like what's happening in the marketplace is the market's bifurcated on the active side is there a firms and we're one of those firms that are taken a net flows that's true both fixed as well as an equities and there are other firms that are redeeming at pretty high rates, where I believe some of the platforms lost some confidence on them and so as dean.
Mentioned earlier, our view is always been that active is all is going to continue to have a place in.
Retail portfolios and those firms that.
Do have something that.
Platform like us ours that stable and can generate returns to recycle like we have are going to continue to to do fine and I think we're starting to see that play on the marketplace now.
And just as a follow up I mean, I'm trying to figure out what's changed is it just all the good things that you've been talking about doing it suddenly come together or is there something specific that you can point to that has changed I will turn the market that makes people realize that.
But there's there's there's real value there and you're offering.
Yes, I think it's hard to point to anything specifically, what I would say is investment performance is obviously really strong that helps a lot.
In addition, as Dean mentioned is our fixed income sales are up over 30% as well and so it's a combination of both the platform that we've built the performance that we have I think convincing clients that it's sustainable over a longer period of time and the uptake in fixed income is helping as well.
Thank you.
Chris do we have the next question.
Okay.
Operator are you on the line.
Your next question comes from the line of Gabriel to Shane with National Bank financial.
Go ahead. Please your line is open.
Just made about dramatic pause before my question.
Yeah.
The group business, I really want to delve into that kind of.
Both in Canada in the U.S., we had morbidity issue this quarter.
And the second quarter in a row for both businesses.
Can you explain what's going on you know its long term disability and kind of a stop loss in the you.
Winded. These problems first appear where are we in the repricing process and how long does it take for you to.
You know restore merge them because of the could be an extended the headwind.
Okay. Thank you for your question. This is Chuck I'll go first and then then can follow up.
You're right. It is unfavorable a this quarter morbidity experience.
The key driver is really an increasing volume of long term visibility cases in group benefits business combined with slower recovery.
And we have taken action going Leo on two things, where we've put in already price increases and we've increased.
Our workforce for staff that is dealing with this with this increasing volume.
And.
If you look at it in terms of the book.
The renewals are such that they are spread out throughout the year, but the highest volume of renewals our January onest. So.
In terms of to your point on timing.
We expect the majority of the impact on earnings to be done in 2020 with some of it in 2021.
What I would say to you.
Yes, we're quite confident that between the price increases and the increasing and staff will retire and experience to where it's being.
I might take the opportunity if you don't mind to talk a little below what we see in the industry.
The drivers of the increasing volume of long term visibility or really mental health, they're growing much faster than the rest.
Our account executive those are managing client relationships are in the market everyday we're talking to clients talk.
They're talking to appears in the industry. Our sense is that this is an industry phenomenon.
And the from the mental health in particular.
And our view is that that supports the kind of environment that you should expect price increases.
Last comment I'll make maybe referred to something Dean said you know anything we do here at Sun life is down from the lens of the client for life approach. So our view is that the mental health in particular has the potential impact too.
Negatively impact on workforce and business results in our clients.
Amnio between US the plan sponsor in the plan member we have.
Align interests and getting people back to work productively as quickly as possible. So Dean mentioned a few things one I will single low is pharmacogenomics.
Yes about using genetic tests to.
Ultimately bring to patients a.
And mitigation, that's more appropriate and came back faster. So all in all I think we're doing a lot of good things Gabrielle.
Variances on favorable of course, but we have it in hand.
We have already taken action and we're confident that will return back to expect that experience in 2020.
Okay, Thanks, Joc and things Gabriel This is Dan fishbein.
Just a few comments on on that first of all the the morbidity experience.
Negative variance in Q3 in the US was about one quarter of the total that you see on the company level and then that was roughly divided equally between the stop loss business the group business and our full scope business. So when you break it down into those pieces. The dollars are actually relatively.
Small compared to the toll results.
I'd also note over the last eight quarters morbidity has been a net positive contributions to the U.S. overall, and we expect to experience would revert to positive or neutral in due course, there's been some attention around the stop loss morbidity and I would note that we had a very favorable first quarter instead.
GAAP loss experience and in fact will stop loss morbidity is still meaningfully favorable year to date, it's natural after that kind of our first quarter result that we get some quarter to quarter volatility.
To follow on that year to date in stop loss, we continue to exceed our margin targets for pricing.
In our stop loss business, so we're comfortable with where the stop loss business is right now.
The timing.
Other than issue, referring margin for next year, you're off or anything like that.
I'm, sorry could you repeat that didnt quite here at all even though there is I don't want to abuse the a.
Question limit here.
[laughter].
Okay why didn't we move on then you can come back and follow up after even if you want game.
[noise]. Your next question comes on line of David Modem Matson from Evercore go ahead. Please your line is open.
Hi, Thanks, Thanks for taking the question I'm.
Just a question for Dan I'm on the M&A and just specifically in Asia, and just wanted to get a sense of.
Whether you prefer a more of an agency business or bancassurance business.
In that market and how you're thinking about that.
Because there is a trade off where potentially higher growth in bancassurance.
Versus a higher margins in agency.
Yeah, David It's Dean I'll take that question.
Our strategy in Asia is a strategy around multichannel distribution.
We want to have agency in every market in which we operate and we do.
And because as you know bancassurance relationships can change over time, so the cornerstone of the business and as you as you allude the margins are stronger in agency sales.
And it's so that's that's that's kind of a bedrock foundation at cornerstone of our of our distribution strategy at the same time. We also want to have bancassurance distribution for a number of reasons. It it at a attaches to in some cases different types of clients are set.
Give clients, it's able to bring our solutions to a wider range of of people in the markets in which we operate obviously helps to cover fixed expenses to a greater extent.
And and it as well helps including in that it not just fixed expenses, but fixed expenses around digital innovation, a as well. So so our strategy is one not of Banco or agency, but bank and agency, but agents starting with Asia.
In same building high quality agency across all seven markets and I would add a third channel to that which as you know, we're investing in and and innovating around alternative distribution channels and telecoms and and other forms of distribution early days on those but that's a third.
The stool.
Got it great and also just a follow up just on the the Akhmad just all the changes that were that were made as well as the you are our reduction.
Is there any go forward impact to our earnings power from the changes.
Thanks for the question, David It's Kevin Morrissey overall across sunlight, we expect the Q3 ocma impact to be modestly positive underlying income going forward.
Most of that you'll see coming through either new business or lapse experience.
Got it and should that be really in Asia is where most of that will come through.
Yes, that's what you see it a I noted.
For you would've seen in our disclosures around the strengthening of the lapse assumptions in the international block.
Universal life business. So we feel that we'd said weve adequately debt without problems. So we don't expect to see that that experience loss persist into the future.
Great. Thank you.
Your next question comes from the line of SMI Malhotra from Scotia Bank. Please go ahead. Please your line is open.
Thank you. Good morning first question is is for Claude and specifically in respect to Hong Kong you had a you'd indicated to us at the international business was likely going to rebound, we certainly saw that this quarter, but.
It doesn't look like there was any detrimental impact on.
Yes, your sales trends as far as Hong Kong is concerned obviously weve.
We've all seen the situation over there the last few months can you give us any.
Any high level thoughts on how Sun life is thinking about.
The business outlook in the interim with respect to Hong Kong and what that means for your Asian franchise.
Claude Academia, thank assignment at Sam.
Regarding the situation in Hong Kong, there has been an impact on the insurance sector and where it shows up is there is a slowdown in mainland Chinese visitors.
Coming to Hong Kong.
And when they when they see the demonstrations on TV, they're reluctant to come to Hong Kong to do that medicals and by insurance.
Impact on out business actually has been quite a modest stuff sales have been quite resilient actually up 115% and so why is that in the current configuration at two thirds of our sales or agency and agencies actually sold 96% to local Hong Kong Commerce, who are already there and they are.
Buying products based on local tax incentives and so we think thats resilient.
If you look at our exposure to a out of control visitors in Hong Kong.
About 20% of our sales I'm from out of country visitors.
But less than half of that it is exposure to China.
Almost 60% of those those are still visiting Hong Kong on Taiwan from Singapore on the Philippines, and so we think we'll see some short term slowdown.
But we're not seeing the any a long term dominion relation to a growth prospects in Hong Kong.
And then to your point I mean, if anything aggregate sales individual insurance sales seem to accelerate in the quarter.
But as we've had some really strong local tax incentives driven by the government.
To sell.
Voluntary helps gains as a give a tax advantaged to people that to buy those those launched this year and they also launched a qualified deferred annuity planned with tax incentives and again those products came out this year as you've seen that those two less helping us.
Alright. Thank you for that next question is for for Kevin strain.
We usually don't talk very much above the corporate segment.
Because there's more more interesting stuff going on most of the time just wanted to make sure I I understand the numbers here.
So the the tax recovery year loss of the corporate segment underlying basis would have been around 40 million.
Which is one of the larger numbers, we've seen and that unit and at least from some of your your commentary your prepared remarks here.
Seems to be expenses that are the that of the area and then coming off an investor day, where there was a number of references to to bending the cost curve and perhaps having gotten too.
A more of a run rate level was with respect to technology spend.
I'm surprised to see costs as the factor pushing earnings in that segment done anything you can offer there on that number on the whole and whether it is in fact expenses that are.
A key factor.
Yes, sumant. Thanks for the question and you've got the you've got the math rate typically we see the corporate segment run between 10, and 20 million positive and of course. The corporate segment does also include the UK and our run off reinsurance basis business, but the that the difference in the quarter largely as expenses and some of those are a sort of.
For a more onetime or sort of volatile in nature. We had some additional long term share based compensation on the share price going up and some other compensation costs that came through in the quarter. There was also a slightly higher run rate on some projects.
For a 17 as an example of that and project that included in the corporate segment and that drove it to be higher than sort of your typical tend to 20 million.
If you think longer term the UK is a closed block and you can expect to see the UK underlying earnings gradually decline and they had a big positive act when this quarter and so that would suggest sort of lower underlying earnings rates in in that segment, but the UK does continue to perform really well being an important provider.
I've earnings and cash flow of dividends to us and having an attractive bar. We so you keep performing well, but as a closed block you'd expect those earnings to sort of slow down over time, So I'd say the big Delta in the quarter.
Does relate to some onetime expenses around long term incentive comp and some other compensation items, but there was a slightly higher run rate in some project costs and then a slightly lower run rate in the UK income.
Thank you for that.
Yeah, maybe more broadly on expenses since I've since I've got the.
Here on this we we're really focused on expense costs and you saw that the controllable expenses are are up 3%, but this is you know a much lower percentage growth and what you're seeing in our business growth in our sales growth and Oh sort of overall metrics of growth and I see good expense discipline in corporate and in each of the business.
Groups and it's something we we look at and talk when a lot and in fact, we're seeing.
The expense a improvements in expense GAAP and some of those types of things. So I think there's a lot of focus on expenses and you can expect to see that continue.
And last one I'll try to keep this one very brief for Dean.
You know the Sun life has been in my opinion, the most consistent company that I cover anyway with respect to its capital deployment strategy.
From share repurchases have been to the point that you're.
Your share count I think is down something like three or 4% year over year is there a level valuation wise that the company considers when allocating capital to the buyback or candidly are you in such a strong position in excess that you think continuing to buy.
Three to 4 million shares a quarter irrespective of relative or absolute valuation is just a strategy you want to continue to fall.
Sumit seeing thanks for the question.
Obviously, we would not comment on the forward view of our plans for the NC IB.
Like most firms we have modeled out intrinsic value of the stock. That's one of the inputs into our thought process on buybacks. It is I'll just remind everyone is just one way to deploy capital and and alongside other things like M&A and reinsurance recapture and so on that we've.
Talked about before so I'm not going to give you a probably a very satisfactory answer to your question in but except to say, yes, we do have a view of the intrinsic value the stock and it's one of our input says we think about how we employ the buybacks.
Thanks for time.
Your next question comes from the line of Doug Young with dish or Dan Capital markets. Go ahead. Please your line is open.
Hi, Good morning, Dan back back to you just on the U.S. group benefits side looks like there was a net loss.
In that and maybe for Kevin It was there a reserve charge or something part of Ocma that hit the group business and I apologize. If you mentioned it but I didn't I don't recall that but it just wanted some clarity on that first.
Yes, Doug it's Kevin more sale take that one so there was a a charge in the group related to the Akhmad. This quarter. So we looked at a stop loss.
Reserving methodology, and we made some changes that incurred including some strengthening going forward. We expect to see as result of that the stop loss. So what did you experience to be less volatile than it has been in the past but that was.
Where some of the the impact was that you're seeing.
What was that yes, and I don't know, Kevin I would add that the it's more of a timing issue that the way we were recognizing liabilities. We historically had recognize them once they started to come in versus once we started to collect premiums. So this really is accelerates the recognition of losses versus.
So changing the amount of the losses.
So does that impact positively impact I guess the future.
Earnings power of the company or of the Division.
Doug This is Kevin again, I would say no I think as Dan said, it's really related more to timing and we would expect to see a less volatility, but not an overall changing the experience looking forward.
So this was an issue with pricing within an issue with underlying experienced this was just Dan you said it was just the timing change.
That's right Yep, Okay, and then just Dan.
You know, 43% increase and medical stop loss, just seems side and so I will add a function of or maybe you can just talk a bit about what's driving that is one of your competitors point I would.
Just hoping on for a little bit more detail on that thanks.
Yeah, Yeah ill remind you that the third quarter and the first quarter or our smallest sales quarters of the year. Most of the sales are concentrated in the fourth quarter as we lead up to the one one date. So you know what we don't want to put too much oh wait onto that however, what I would say as ours.
Stop loss sales year to date and really over the past three years have been terrific and growing at a good pace and what I would say is we you know we really feel we're executing well we have the strongest sales organization really good products reliable underwriting an excellent partnerships with our broker distributor.
There's a and that's bringing more and more of the market to US we continue to see what we would describe as a rational pricing environment competitively and in fact, we continue to exceed our pricing targets a year to date on both new sales are in renewals. So we're happy to keep.
Adding market share at those levels.
And this is still fair to say to stop loss business. The margin is above your your 7% targeting on your group employed plan business its.
Still below and Theres going to be Convergences, I know that something you've kind of talked about in the past is that still the case here.
Yeah, I think you've got that right within within that are stop loss business is you know performing really strong lead I would say this quarter, though the group business made us significantly bigger contribution to the total on so maybe we're seeing some of that convergence overtime, we would not expect to stop loss.
Business to be able to always overperform its pricing targets. That's just inevitable it should come back towards the pricing targets, but at the same time the group business margins continue to improve on and we are starting to see and should continue to see a better balance between the two.
Great. Thank you.
Your next question comes from the line of Tom Mackinnon with BMO Capital Go ahead. Please your line is open.
Yeah. Thanks, very much I want to pack talk about the the a impact the new business in Canada and in Asia.
The impact any business in Canada.
Just a 13 million certainly a lot lower year over year and you just a yeah. Its sales I guess overall relatively flat, but you just say its related interest rates. So I just going to reprice your products or if rates just kind of hang low you're just going to suffer with lower at new business gains talk can you tell us whats your actions.
Our here.
Yeah. That's all my this is our thanks for the question I'll go first maybe you can do Asia.
So it's really the driver this quarter isn't the the individual insurance business. It's economics as you point out, but it's also a I would say some of it as lower lower volumes.
Right the pointed out the broader sale.
We have an increase for example in GB sales, but the mix was more in terms of.
What do we call Arieso business versus the fully insured business. So so that those are some of the drivers in terms of.
What do we might do on repricing.
At this stage this is something I would say we.
Review regularly we think about it we look at the competitiveness of our product versus others and of course, our profitability targets.
I will say at this stage.
Where we might go but Tom this is something that we.
Additionally review on an ongoing basis.
I would assume that like at least half your products will be par and I wouldn't anticipate that they'd get significantly impacted turned to strained by lower interest rates is that correct.
That's true although when you say, it's mostly apart remember that we sell mostly bar in our third party channel.
It's a bit more diversified in our.
And our own network of careers for sure so the advisor.
Okay and then.
Maybe a clawback them.
With respect to Asia.
And I've been talking about these great sales year over year, and certainly acknowledged that but the you actually had higher.
The strain is even more negative now so or negative impact on earnings. So what's happening here is this business or is it more costly to put this new business. On then it wasn't the past or is there certain issues with respect to.
Some products in a in a in various countries I did notice that the Asia expenses are up significantly year over year as well like they're up something area about 20%. So is there anything else that's driving the fact that you're still getting the same kind of at negative impact from strain despite the higher sales.
Thank you Tom Claude I come here at the New business Gate picture is actually an amalgam of eight different countries right and so you need to look at reached where each of those are in there and business development as you point out new business gains are down to a 2 million. So 2 million unfavorable the strong parts or the mature businesses. So if you look.
Look at the international a 25 million of sales up 20%. If you look at our other big driver of high net for sales in Hong Kong, a high net for sales or actually a double a year over year, and so where that shows up in new business gain if you look at Hong Kong and.
You look at international.
Our new business gains are actually up 5 million.
There are a 30% and so are you seeing that driver that connection that you're looking for that as strong sales drives profitability gains in those two mature businesses at two other businesses are in different cycles. So in China, we're growing our relationship with a new online provider and as we build out that relate.
Openshift, we've gotten very strong sales at but that will drive expense gap, so higher expense gaps in China and similarly in India that you've seen amazing sales results in India with the new HDFC Bank assurance deal and as we invest and bring on that capacity. It does create some strain in sales said that it's got the night.
Future value down the road and so those businesses are in different cycles, and but I think a the aggregate result is as as I would expect when you put together those those different pictures.
That's great Claude Thanks, and congrats on your retirement.
Thank you Tom.
Your next question comes from the line of Merial.
Mandan Mendonca from TD Securities Go ahead. Please your line is open so very quick question back to these toxins onto some Hong Kong based out.
Very temporary nature is there an expectation that he's going to go away sometime soon.
Marriotts Claude you're the voluntary health as scheme is is a long term program by the government to try and get people to buy more health insurance claims to self insure themselves and so that can only work if they continue that for a while and they also want to drive people to invest.
In their own private savings programs and that's the Q debt and so we're not seeing those a short term programs.
So no expectation to either one will be pulled.
One of the drivers of demand that we see for our business around the world. This downloading of responsibility governments can't afford healthcare in most markets and they're asking their citizens to step up and pay for it and you know there's same with retirement savings inadequate retirement savings systems in most of the markets in which we operate and again.
And they're trying to.
Through tax incentives find ways for people to save for retirement, because these countries know they've got a serious issue.
So just sounds like an example of the demographic pressures that you've been we've all been talking about for some time playing up exactly thank you.
[noise]. Your next question comes from the line of Darko Milicic from our B.C. capital markets Coed. Please your line is open.
Hi, Thank you a question for Kevin you mention the lie cat ratio.
Basically losing now under any interest rates scenario I'm interested in what happens if I mean does it get worse, what what if rates do fall by 50 basis points.
You have a decrease in the like that ratio what happens then to the scenarios do other scenarios crop up and and is this possibly why.
Like at ratios are so high.
Just because like we don't understand the second order effects. After another drop maybe you know should address that if you can.
Darko thinks that question. This is Kevin <unk> I'll take that one.
So this this discontinuity that we see in in capital for sunlight <unk>. It's about five points is this is really isn't one time event, although it could go back but it's not as if there's a series of discontinuity. So after we would see that one point that change from the scenario switch you would expect.
Go back to our normal pattern of seeing an improvement in her like at ratio as interest rates go down for.
Darker when I want to just bad add to that and they think that would make that quite clear that it's the scenario switch and then we go back to sort of the more normal read the what we're talking about relates to ask my way right and the potential personal switch and that's a way. If we had seen that same if we'd seen interest rates go down a little bit where we had had the scenario switch that would not have a.
Applied to ask a laugh in our case in this quarter, if that had happened and so I you know I like to also focus on US a left where we over the 220 billion a a cache and the and I really strong like Cat racial there as well and then that's that's the that's the sort of true financial string through the entire company is I.D.S. left level.
Okay, Great. That's very helpful. Thank you.
Yeah.
Your next question comes from the line of Nigel dispose of from various investment Research go ahead. Please your line is open.
Uh-huh. Good morning. Thank you for taking my question I wanted to just quickly it's not a few follow ups regarding the favorable impact you have on the resolution attacks matters from prior years and apologies if you've already elaborate your answer this but could you provide some more color on what exactly those tax matters. We're.
And if we should expect a feral impact from those Ah tax related items in future quarters and building off that am I right to assume that.
Your approximately 9% effective tax rate underline that income.
It was mainly driven by those items and a an extension of that question.
What should we think in terms of the go for great for your effective tax rate online that income.
<unk> okay.
Well. Thanks, Thanks for the question the Nigel and Yeah, you're you're you're we had two large tax issues that were resolved in the paper away in the quarter. They were both related to prior tax years, where there were audits were appeals that we're that we're still open and it's not unusual for us to have tax issues from prior years that get resolved in the quarter.
And we we we typically take these as we did in this case through through underlying Ernie and we do this whether the the issues are positive or negative. So that that's what you know when we look at these you know we have other issues are related to prior years and sort of <unk>. This time. It just happened to be that there were two positive ones that were unusually large that they came through.
They make up the majority of the $70 million that that you don't you saw we are we talked about and we would expect that these would have positive impact on earnings going forward and the positive impact you know you can think roughly in the neighborhood of of three cents a share kind of thing for the for the year.
And so we don't see this changing our range and 15% to 20%. We're still in we still see a range of 15% to 20% <unk>. It was what it's certainly what drove us below the range.
Was the resolution of these two issues.
And just a clarification question that 15 to 20 per cent. That's on a go forward pieces of huh.
Expectation for the entire fiscal year of 2019 is that right Oh not yeah, yeah not for this year. So that's for sort of a go forward bases on on I kind of a run <unk>. These we would continue to see to see the same impact or that 70 million on a year to day basis by the end of the year.
Okay. Appreciate the color. Thank you.
And there are no further questions at this time I'd like to turn the call back over to Mrs. Chalmers for some closing remarks.
Thank you and I would like to think Oliver persistence today and if there are any additional questions. We are available after the call.
<unk> to listen to the rebroadcast it will be available on our website later this afternoon and Q. and have a good day.
This includes today's call. Thank you for your participation you may now discussing.