Q4 2019 Earnings Call
He was Andrew and I'll be your conference operator today.
At this time I'd like to welcome everyone to the Sun Life Financial Q4, 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 and answer session.
Most of the call is Lee Chalmers Senior Vice President head of Investor Relations and capital Management. Please go ahead Mr. Thomas.
Thank you Andrew and good morning, everyone welcome to Sun Life Financial Inc. earnings Conference call for the fourth quarter of 2019.
Earnings release, and the slides for today's call are available on the Investor Relations section of our web site at Sun Life's Dot com.
We will begin today's presentation with an overview of our fourth quarter results by Dean Connor, President and Chief Executive Officer at Sun Life financial.
Cindys remarks, Kevin strain executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After their prepared remarks, <unk> moved to the question and answer portion of the cool.
Other members of management will also be available to answer your questions on today's call.
Turning to slide two I draw your attention to the cautionary language regarding these forward looking statements and no one I first measures, which form part of today's remarks.
As noted in Thislife forward looking statement, maybe rendered inaccurate I subscribe to that.
And with that I'll turn things to Dean.
Thanks, Lee and good morning, everyone.
Turning to slide four we made good progress in the quarter. The company reported underlying net income of 792 million up 10% over the fourth quarter of 2018, we generated an underlying return on equity of 15% in Q4, while continuing to deploy capital in a disciplined way with the announcement of the info.
Red capital transaction, and a new 15 year bancassurance distribution arrangement in Vietnam.
In the fourth quarter, we grew wealth sales by 24% over the prior year insurance sales grew 7% over the prior year, including particular strength in Asia, where we grew sales by 43% on a constant currency basis with double digit growth in six of our seven local markets.
The value of new business or VNB grew by 9%, reflecting higher sales, partially offset by changes in sales mix pricing and the impact of lower interest rates.
On a full year basis underlying net income exceeded the 3 billion dollar Mark for the first time, an underlying earnings per share grew 6%.
During the onetime impact of interest on par seed capital in Q1 of 2018 underlying EPS grew by 10% in 2019.
For the full year, we achieved an underlying return on equity of 14.3% and returned over $1.8 billion of capital to shareholders through a combination of dividends and share repurchases.
There were a number of notable achievements in the fourth quarter as highlighted on slide four I will touch on some of these is I take just a few minutes to step back and reflect on the progress. We made in 2019, moving sunlight closer to our ambition of being one of the best insurance and asset management companies globally.
Turning to slide five our client for life strategy puts clients at the center of everything we do.
This is evidenced through our culture, one that is client obsessed driving towards the purpose of helping clients achieve lifetime financial security and living healthier lives in the first quarter of 29 team. We reached a milestone of one trillion dollars in assets under management, demonstrating our scale and global presence in key markets.
It took us 147 years to reach the first 500 billion of a whim and just seven years to add the next 500 million in 2019, a U.M. grew to 1.1 trillion dollars benefiting from strong market growth the closing of an acquisition and growth across our businesses.
This includes businesses like Sun life Global investments, our Canadian retail wealth manager that we started from scratch in 2010.
That's LG I now has $29 billion of AIU EM.
Oh, 27% last year and it delivered net sales of 2.9 billion strong investment performance for clients and a solid and nicely growing contribution to net income.
And SLC management, our third party alternative investment business, Hey, you EM grew to nearly 84 billion in 2019, including approximately 13 billion in real estate assets acquired to the closing of dental Green Oak on July 1st.
In the fourth quarter of 2019, we announced our intention to acquire a majority stake in infrared capital partners and as a reminder, infra red is a global infrastructure equity manager headquartered in London was approximately 16 billion of it you win.
Infra Red has built a sterling reputation and infrastructure investing including renewable energy, such as wind and solar social infrastructure, including schools and hospitals as well as transportation.
This acquisition will help accelerate the growth of SLC management, while providing infrared access to our north American distribution capabilities, including now over a thousand institutional clients, who have growing demand for sustainable investing strategies.
Putting infrared.
SLC management should reach 100 billion of AIU and Twentytwenty just six years after we launch the business.
MFS ended the year with Usfive hundred 27 billion in a U M. A growth of 23% for the year. This reflects outstanding investment performance higher capital markets positive net retail sales now over the past four quarters and momentum in our strategic buildout of institutional fixed income and non.
You asked retail solutions for our clients.
MFS is investment performance continues to shine with 93%, 93% to 98% of MFS is U.S. retail mutual fund assets ranked in the top half of their lipper categories for 10, five and three year performance respectively.
On a full year basis underlying net income in our asset management pillar grew 9% driven by growth in fee income on higher average net assets.
Throughout 2019, we continue to invest to further our digital data and analytics capabilities, allowing us to drive efficiencies as well as create innovative ways to interact with and delight our clients in Canada through our top rated client up my Sun life, We created a digital platform that provides a single point of contact.
For a wide range of health resources, including our provider search feature to date, our users have logged over 10 million ratings of their health care providers and now by opening up the platform to all Canadians be aluminum health, we're averaging 10000 searches a day, which allows Canadians to find the health.
Care, they need when they need it and where they need it.
And our digital coach Ella delivered nearly 12 million friendly digital not just last year driving an additional $650 million insurance coverage for our clients and an additional 410 million of wealth deposits.
In the U.S., we largely completed the integration of the E B.
Acquisition, including the full achievement of the 100 million dollar expense synergy target.
We also rolled out our Sun life plasma plus Maxwell health benefits platform and by the end of 2019, we had enrolled over 10000 families. On this new platform, which provides a modern intuitive education and enrollment experience for our plan members.
In Asia, we completed the rollout of client mobile apps across all seven of our local markets, allowing clients to interact with us in more convenient ways. This includes examples like 24 hours claims payment turnaround times in Hong Kong or Sun Smart, our digital point of sale tool, which increases the productivity of advisors.
And in most markets now where it takes only 15 minutes to complete a policy application.
We also continue to experiment with strategic partners, including Telcos like you mobile in Malaysia sure Tech startups like bow tie life insurance in Hong Kong and digital marketplaces like Lazada in the Philippines. These partnerships are allowing us to expand distribution across the region and interact with clients in ways that our convenient for them.
We enter this new decades with good momentum and we have a lot to look forward to Kevin strain will speak to how we performed against the medium term financial objectives that we set back in 2015. The team has executed well, resulting in a five year total shareholder return that averages 11.2 per se.
Cent per annum ranking us in the top quartile among 20 global competitors.
We're pleased with the overall results in 2019, and we start 2020 from a position of strength or like at ratio of 143% at SLF Inc. low leverage and $2.3 billion of cash at the holding company provide us the flexibility to deploy capital in a disciplined manner.
Regarding the new Corona virus Colby at 19.
We feel for the many people whose lives have been touched by and in some cases lost to this new virus.
Employees and advisors in sunlight, Hong Kong and Sun life Everbright in China are following prescribed regimes that include working from home daily reporting on health and essentially no business travel.
In January we announced a number of changes for clients, who are diagnosed with koby at 19 to make it easier for them to access care to extend the grace period for premium payments to accelerate claims payment and so.
We did not see immaterial impact in Hong Kong and China sales in January but looking forward, we expect to see some slower sales and modestly higher claims.
And the bigger question is to slow down in economic growth in China and for the global economy and in particular, how long that lasts.
Sending back we feel that Sun life is well positioned to play both the strong offense and a strong defects are diversified and balanced business model for strong pillars client obsessions strong talent in culture technology positioning along with our strong capital and risk posture provide a great opportunity for Sun life.
To serve the secular drivers of demand for future growth and to deliver on our purpose.
I'd like to acknowledge that Leo Graben appointed President of sunlight Asia January the first is with US on the call today for his first quarterly earnings call and with that I will now turn the call over to Kevin strain will take us through the fourth quarter financial results.
Thanks, Dean and good morning, everyone turning to slide seven we take a look at the financial results from the fourth quarter of 2019. We finished 2019 with strong reported an underlying net income.
Underlying net income for the quarter was $792 million translating to underlying earnings per share of $1.34 up 13% from the fourth quarter 2018 I.
Underlying return on equity of 15% was above our medium term objective of 12% to 14%.
Reported net income of $790 million was up 24% on stronger underlying earnings and favorable market related impact compared to the prior year, partially offset by higher MFS share based awards driven by growth at MFS during the year and a restructuring charge taken in the corporate segment relating to expense saving initiatives in the fourth quarter.
Our underlying net income in the fourth quarter was driven by business growth across all pillars higher tax benefits in corporate Paypal credit experience and higher investing activity gains. This was partially offset by unfavorable morbidity experience in Canada and unfavorable expense experience in corporate mostly from higher incentive compensation costs.
Yes.
Book value per share me being relatively flat year over year as growth in book value from earnings was offset by dividends currency translation in accumulated other comprehensive income and equity reduction related to the close of our acquisition of a majority stake in Bentall Green OIC in the third quarter.
We continue to maintain a strong capital position with a light cat ratio of 143% for Sun life financial Inc. and 130% for Sun Life Assurance couple of Canada, the 3% change at SLF from the third quarter was driven by the redemption of the sunlight exchange will securities as well as interest rate movements.
For light cat sensitivities interest rate moves in interest rates move back up in the quarter. As a result of risks sensitivities have reverted back to what we've seen in the past where the why can't ratio will decrease with rising interest rates and increase with declining interest rates.
Sensitivity of like had two scenarios shift remains and falling interest rates could again, we was closer to a scenario switch like the one you saw in or sensitivities last quarter.
At the end of fourth quarter, our cash position at the holding company was $2.3 billion and the financial leverage with 21.2%, which remains below our long term target of 25%.
Assets under management grew 1.1 trillion dollars grew to 1.1 trillion dollars up 16% from Q4 2018 on strong growth in our asset management and insurance businesses.
Slide eight provides details of underlying and reported net income by business group for the quarter in Canada underlying net income of $264 million was up 8% from the prior year, reflecting business growth higher investing activity and FX gains. This was partially offset by unfavorable were busy in our group benefits business.
In the U.S. underlying net income increased 13% to $137 million with favorable morbidity experience and higher FX gains, partially offset by unfavorable mortality experience.
In Fourq management block.
The after tax profit margin for group benefits was 7.3% on a trailing 12 month basis compared to 6.7% in the prior year.
You asked this is imports grew 7% from Q4 2018, driven by 17% growth in or stop loss business.
Our asset management businesses delivered underlying net income of $281 million, an increase of 24% compared to the prior year driven by higher average net assets at MFS and the addition of income from Bentall Greenock acquisition, which closed in July of 2019, the pre tax net operating profit margin for MFS was 40 per.
Sense.
Consistent with Q3 and slightly higher than the prior year on a standalone basis underlying net income at MFS increased 20% from the prior year, well ESL fee management underlying net income more than doubled.
In Asia underlying net income grew 2% year over year, and a strong business growth and expected profit and lower new business strain were offset by unfavorable experience in our China joint venture and other investment related experience.
Slide nine provides detail on our sources of earnings presentation.
Expected profit of $849 million increased 14% from $744 million in Q4 last year led by 14% growth in Asia, and 11% growth in Canada. If you exclude the impact of currency and the results of the asset management businesses expected profit grew 7% over the prior year.
We had new business gains this quarter of $22 million compared to gains of $17 million in the same period last year with the year over year improvements coming from lower acquisition expense gap on higher sales in Asia.
Experience losses of $18 million pre tax for the quarter were predominantly caused by the unfavorable morbidity in Canada and unfavorable expense experience in corporate resulting from higher incentive compensation costs, driven by the increase in our stock price and higher project costs.
Partially offsetting these impacts were higher investing activity favorable credit experience as well as favorable net market impacts.
Assumption changes in management actions were minus 16 million pre tax this quarter.
Other inner sources of earnings, which total loss of $180 million $108 billion included a higher fair value adjustments of MFS share based payment awards.
Other also include acquisition integration and restructuring costs and the impact of certain hedges in Canada that do not qualify for hedge accounting.
Earnings on surplus of $150 million were largely in line with the fourth quarter of last year as higher at best gains were offset by real estate market losses, and a mortgage impairment.
Our effective tax rate on an underlying net income for the quarter was 13.9% below our expected range of 15% to 20% mainly due to investment income on tax exempt assets.
Slide 10 shows sales results across our insurance and wealth businesses total company insurance sales were $1.4 billion in the fourth quarter up 7% from the prior year.
Ken insurance sales were up 4% driven by higher individual life insurance sales.
Sure in sales in Asia continued to show strong momentum in Q4 up 43% on a constant currency basis compared to the same period last year, we saw strong growth in all local insurance markets as well as in international.
Hong Kong achieved its highest level of insurance sales for the second quarter in ROE driven by strong agency and broken sale and the popularity of our new tax deferred products.
Fourth quarter sales in our US group benefits business were down 4% year over year due to lower large case employee benefit sales. However, full year sales exceeded $1 billion, which represents the highest sales year in our U.S. group benefits business.
Total company wealth sales were $45 billion in the fourth quarter up 24% from the prior year in Canada, well sales increased 21% driven by increased mutual fund sales in individual well as well as large case sales at our group retirement services business, which grew by 19%.
This includes $1.5 billion in fourth quarter defined benefit solutions sales as clients continue to turn to west for solutions to de risk their pension plans.
Across MFS and SLC management sales increased 25% on a constant currency basis total gross sales at MFS grew by 22% benefiting from strong growth in the U.S. retail side, which experienced net inflows for the fourth quarter in a row overall MFS experienced outflows of us $1.2 billion in the quarter. So.
Terrific and improvement, reflecting those strong retail net flows.
Yes, we'll see management, we continue to see net inflows as gross sales increased by 82% over the prior year.
In Asia wealth sales were up 8% on a constant currency basis.
This was driven by higher money market sales in the Philippines and growth in our Hong Kong pensions business, largely offset by lower mutual fund sales in India.
New business VNB grew 9% to $337 million growth from sales in insurance and wealth was partially offset by mix pricing and current interest rate environment.
Slide 11 provides a view on operating expenses for the full year operating expenses were up 8% on a constant currency basis controllable expenses growth in 2019 was 3.6% and reflects our investments in growth.
We're determined to continue to manage our expenses closely and push so that expenses grow slower than the rate of earnings and expense allowable growth to support. This we took several steps to reduce expenses in the corporate segment in Q4, resulting in a restructuring charge of $30 million $33 million pretax, which we believe will result in expect expense savings of roughly.
At the same amount starting in 2020, we will continue to find ways to reduce costs, while delivering on our client strategy and investing in the future.
Turning to slide 12, we sold the 2019 full year progress against our medium term financial objective as well as a five year view.
Underlying EPS grew 6% in 2019.
Nothing for the interest on the transfer of Park seed capital include it in 2018 underlying earnings underlying EPS grew 10% year over year on a five year basis underlying EPS has grown at a rate of 12% per annum above our growth objective of 8% to 10%.
Underlying our we was 14.3% in 2019 and averaged 13.2% over the past five years.
The dividend payout ratio has remained inside our target range.
Dividends grew 10% last year and 8% per annum over the past five years.
This consistent return of cash to shareholders through our dividends is driven by strong earnings growth and cash flow from our businesses. We're pleased with these results are heading into 2020 physician of capital strength.
We continue to be committed to achieving our medium term financial objectives. Our client strategy has been the center of our success with all four pillars growing in 2019.
Throughout the year, we deployed capital for organic investments, including investments made in advancing our digital capabilities as Dean mentioned earlier. We also completed the acquisition of Bentall Greeno entered into several strategic partnerships, including a new bancassurance arrangement, Vietnam and returned 60% of our underlying net income to shareholders in the form of dividends and the share by.
Back.
At the end of 2019, we had $2.3 billion in cash at the holding company and a low financial leverage ratio, providing a significant capital deployment flexibility as we started a new decades with opportunity and strength with that I'll turn the call. The 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 your questions to one maximum too and then to re queue with any additional questions with that I will now ask Andrew to please pull the participants for question.
Thank you.
Ladies and gentlemen, if you have a question at this time. Please press star one on your telephone to withdraw your question press the pound key.
And your first question comes from the line of David motivated.
From Evercore.
Pardon me David Please check your mute button.
And can and you can we move onto the next question certainly our next question comes from the line of Humphrey Lee with Dowling and partners.
Good morning, Thank you for taking my questions.
My first question is related to the unfavorable mortality in the U.S. This quarter I was just wondering if maybe Dan can provide some color in terms of what he saw in the quarter, where does the frequency severity or vintages.
Yes, thanks, some free and good morning. This is Dan fishbein.
Yes, we did see some unfavorable mortality in me enforce management or individual life business and our study of that shows that much of that was due to a relatively small number of large claims.
We think we will see this kind of volatility from time to time in this block odd there are some larger policies in the block. We also are increasingly have some claims that are not subject to reinsurance.
So there was what we would view likely volatility in the quarter.
[noise], but how does that backdrop I guess, so I think in the past Kevin has mentioned that because the cash flow from that block of business is very attractive. So you like having a keeping it but since then like I think there's a lot of transactions in the U.S. life insurance marketplace and some of the multiples seems to be.
Pretty attractive to have those transactions change how you think about the this blog kind of going forward.
I'm sorry, it's Dean Connor. Thank you for your question.
When it comes to our closed block businesses.
We are our primary focus is to optimize them optimize them for you know two great job for the clients, but optimize them for true capital and tax in operating efficiencies and and so on and a in reinsurance all of the moving parts. We obviously keep an eye on transaction.
In the market that come and go.
But our job one is to really run these business is extremely well and and optimize them for the benefit of all the all the stakeholders.
Got it thank you.
Thank you.
Your next question comes from the line of Moneygram in with Cormark Securities.
Hi, Good morning, just a question about the unfavorable JV experience in Asia good.
Talk to that a little bit more and specifically talk about your expectations going forward.
Hi, good morning.
Yes, Leo here.
I will let me take out the first part of your question around the unfavorable joint venture experience as you know.
Got joint venture arrangements then.
China, India and Malaysia.
The reference.
I think you're referring to with yet they relate to our China joint venture.
Where.
Some small one time I don't support for about a penny per share.
Yes.
And then.
Your broader question.
Oh.
Going forward, then and the result.
And.
When you take out.
So first small one time items.
Quarter.
Our income growth would have been in 14.
So we still feel not very good about our ability to achieve our medium term target.
Can you give a little more detail in terms of what are the what's the nature of those onetime items.
Yeah. So.
Hi.
A number.
In light of normal variances that you would see quarter over quarter.
Just all pointed in the same direction this quarter as well as an example.
Last quarter, we had mortality gain a small mortality again.
This quarter, we had a small mortality locked for small on both sides, but.
That that's an example.
Like the.
Hi, there.
Not loss this quarter so.
Just a few small items like that that just happened to point in the same direction.
Okay. Thanks, Brett.
Thank you.
Next question comes for the line of Gabriel the Shane with National Bank financial.
Good morning.
In the first question for you you talked about Corona virus impact on your business than the could come back sales going forward and claims I got the sales, but maybe you can flesh out the.
The claims commentary or where you'd expect the show up and then offer on my group question in Canada.
Morbidity was negative again.
And kind of out of.
Joc could you give me a timeline for when you expect the repricing initiative, which is underway the third.
Translating through margin improvement than an elimination of this issue.
Okay, but seeing thank you for your questions legal why don't you start with the Cobot 19 question on claims.
Yep.
Thank you Gabriel.
So on.
And potential impacts on planes for sexy it it's too early to tell.
You got to depend on.
Scale of.
Of the epidemic.
From a claim standpoint.
Lot of.
A lot of.
<unk> expenses that are flowing through the system.
Economies in Asia.
On our getting captured by the public system.
If you look at Hong Kong China.
Patients aren't getting send to public hospitals.
So you don't expect significant impact on health insurance claims there.
Obviously if.
Things deteriorate rapidly you could you mortality claims.
Increase in a material way, but I think it's just much too early to tell.
This is going to end up.
So the precautionary commentary I guess.
That's right.
And shock you want to comment on the morbidity in Canada.
Hi, good again, thanks for your question so right right.
Higher incidence continues its.
In the visibility part of group benefits, because you're pointing out.
And as I said last time.
We have started in fact pricing action last year.
We will be basically 100% done by the end of Q1 this year.
No the renewal cycles of these clients as such.
It hits of different times, so most of our book.
To review January Onest, where we're getting quite a bit theres from July 1st.
So when you look at it goes I would say.
Roughly 60% this year and 100% by next year.
Oh, that's where we are.
Thank you.
Thank you.
Your next question comes from the line of Sumit Malhotra with Scotiabank.
Thanks. Good morning first question is for Leo and it's about your.
Joint venture in the or sorry, your distribution agreement in the in the Philippines.
Looking at your sales numbers, Philippines, when one of the stronger.
Drug or fees for individual life sales for the company in Asia. The last couple of years.
I don't know if there's any economics you provided on the.
On the new relationship you have your and more specifically.
With with growth already trending well, where where exactly does this distribution agreement benefit the company in terms of sales going forward.
Hi, good morning.
Neil here.
When youre, referring to our new.
Hi.
Relationship I think you're referring to Vietnam.
Sorry, I said, Philippines, Korea, Vietnam, Vin I'm, sorry about that.
Yeah. Okay. Thank you. So yes, we signed a new partnership deal. Thanks, Thank our partnership deal.
Yes.
Last year with TD Bank.
As you know from.
Did you send point distribution excellence is core pillar of our strategy in Asia.
And weve been.
We've been driving.
Diversified strategy.
With strong growth.
Quality improvement in agency bancassurance and brokerage so across our markets were driving for expansion on all fronts.
In the case of.
This was one of our few markets, where we did not.
We shipped in place.
And we were very excited to team up with TD bank he'd be bank one of the fastest growing up thanks.
It's also.
Well aligned with our strategy and that they are fairly client focused very.
And so we.
We see that.
Step for us in in that market and we expected to be a meaningful contributor to our sales and get now.
And I think you answered some are there for me is.
So I Didnt I wasn't sure if you had anything outside of the agency channel and in Vietnam. So this is your first entry into into bancassurance or their country.
That's right.
And second question final question is for Dean.
Deane, we spoke last quarter, a boldly the company's philosophy around share repurchases and you you've made mention about the intrinsic value the management considers.
In a coincidence or not you have not been active on on repurchases for the first time in a while I know there were lot of things going on let's call. It off the field with the infrared acquisition and.
Some debt redemptions, maybe maybe other considerations.
In thinking about capital allocation in 2020 or share repurchases or something that are intrinsic value.
Base still makes sense right now or are there. Other factors that you think in terms of organic growth, let's take a higher priority as you think about the coming here.
Assuming it's dean. Thank you for your question I'd first remind investors that our priorities for capital allocation, our first and foremost two to fund organic growth that includes seed capital for investment strategies, but driving organic growth and then second of all acquisitions acquisitions that are aligned to our strategy.
And meet our hurdles and thirdly share buybacks on buybacks. There are number of factors that we do take into consideration, including our capital position our excess cash the M&A pipeline as we look forward and expected returns on buybacks versus alternative uses of capital.
And and valuation and so on so the number of things that we consider at any point in time. So we have done buybacks in the past obviously, we expect to do them in the future. We don't comment on any particular quarters buyback activities. So.
[laughter] I won't answer your question, perhaps is directly as you'd like but I would just say it's it continues to be a very important part of our of our stable of of leavers to allocate capital and you'll just need to stay tuned as we go forward.
I got to get you to share your your intrinsic value model with me I need to maybe baked that into my own consideration.
Thanks for your though.
Thanks.
Thank you and our next question comes from the line of Doug Young with David Jordan Capital.
Hi, Good morning, just maybe following on the capital question Dean or Kevin I think in the past you've talked about sunlamps ability to generate excess capital and around 800 million per year and that's after dividends and funding organic growth has that has that changed at all.
Hi, Doug it's Kevin our view on that is still the same we're generating between 800 million plus or minus the each year and ER and the the idea would be to maintain our our capital flexibility.
And to to look at it that way so the the 800 million per year continues to be roughly the additional capital we're generating.
And I think along the same line.
Your next question I mean, I think you've kind of signaled maybe 200 million of buybacks per quarter, but and I know, it's not going to be even but it doesn't sound like thats necessarily going to be ongoing are consistent with.
That's fair to kind of read that into it I.
I think being addressed a well right it's going to depend on a number of factors what we see on the M&A front, what we're having to do the mentioned seed capital.
What we see in terms of organic growth. So there's a bunch of factors that go into our decision each quarter, whether we do the buyback, including intrinsic value, but we're not going to comment on which one of the factors is driving us not to buy any particular quarter right like Theres a lot of sensitive information inside of that on the M&A front and those types of things. So we're we're.
When we look at it every quarter.
If we're not buying it could be any one of those factors from organic growth to M&A to two other things.
Okay, and just second I mean, Dan.
The integration of assurance group business is done the earnings growth has been.
Strong and you've you've gotten into that margin range in which you you targeted so so maybe maybe I can phrased. It this way what's next I mean is there.
Room to push that margin target higher in the U.S. group insurance business because it feels like some of your peers out there are targeting higher margins than I know the stop loss seems to be maybe above target, but this seems to be opportunity on the group employee benefit side. So just hoping you got some color.
Yeah. Thanks to as you know where as you noted were above the target that we said at Investor day of 7% or higher and we seemed we're staying above that target of course, there's a composition of businesses. There, there's our stop loss business, which the especially the path to two years has.
Performed actually above our pricing targets and there is some reversion back to the pricing targets, that's happening and inevitably will happen, but at the same time as you noted we're continuing to improve the margins in our core group business that full life disability dental.
And voluntary so we're seeing some a shift in the mix there the margins have been coming up.
In the group business and there's still more opportunity for that margin to come up.
A big part of our opportunity is also growth we've had significant growth 17% for example in business enforce year over year in the stop loss business and as we put the integration in the group business in the rear view mirror, which and any conversion process, obviously dampens.
Your growth and can lead to some additional lapses with that now in the past, we think that we should start to see some good growth in the group businesses as well. There's also significant growth opportunity from what we refer to as closing the coverage gap tools like Maxwell and others that we're employing to encourage people to.
Who enroll for the right amounts of coverage and to have the employer partners, we work with offer more of our product.
And then finally in our Fullscope business, we have a nice growth happening there and we are launching new lines of business. For example in the quarter, we introduced our stop loss offering to health plans. Our first partnership around voluntary products and we expect that to add to our growth going forward.
Thank you.
Thank you.
Your next question comes from the line of Tom Mackinnon with BMO capital.
Yeah. Thanks, very much a couple of questions just the start up but with respect to Asia, we seen nice growth an expected profit we since strain coming down.
I think you talk about whittling away the expense gap here.
But was this an accent exceptionally strong quarter or do you think you've got things in motion here to be able to sort of continue at a 15% kind of the underlying earnings growth rate for Asia.
Have you built sufficient scale to be able to do that do we have to have you know what kind of sales growth momentum do we need in order to be able to kind of hit that targeted 15 growth rate for that segment.
Yes, Hi, Tom.
Here.
So, yes youre right.
Highlights that we had a good quarter in terms of.
Expected profit growth and reduction in new business strain.
14%.
Improvement in expected profit.
Quarter over quarter, new business strain reduced by about $7 million So I.
Taken together, that's about 25% growth year over year, so good quarter not in that respect and so as a result.
That gives us some good confidence that the 15%.
Underlying earnings growth.
Year over year or is it something.
We're quite confident in delivering.
Okay. Thanks, and then a follow up just with respect to the 800 million in free capital.
You will generation.
I assume this [laughter].
Matt.
In that Guy you have some measure of organic growth because obviously they didn't want to grow organically and that number would probably be bigger so what kind of level of organic growth is embedded in that 800 is that youre, 8% to 10%.
Underlying earnings growth guidance is that embedded in terms of organic growth in that 800 million.
You're right Tom the 800 million does include the organic growth the organic growth you're talking about is capital growth, though not not just EPS growth. So it would be slightly different than that but we it's based on our plans and how we see the the business growing right. So if you assume your underlying earnings are going to grow in the eight.
10% range, you could still see 800 million free capital generation annually, Yes, that's correct that's embedded into the those numbers. It's just when you talked about using that money to fund organic growth that would be I assume that would it be above and beyond the 8% to 10% you're trying to get at that yes, yes thats curve.
Okay, and then finally, the taxes were lower you talked in.
A more tax exempt.
And help in the quarter.
Is that a is that tailwind going to continue or how should we be where do we use the thinking about moving towards the lower end of your 15 to 20 guide or how should we be thinking that.
You know, it's we benefit from a balanced business model across a number of geography is right and that's what supports our effective tax rate of 15% to 20% and when you think of where we are any given quarter. It depends on where the incomes coming from and what that looks like so I'd say, we we still feel like 15% to 20% is.
Is the right range, but what happens in any given quarter depends on where where the incomes coming from and and drives us sort of up and down in that range.
Okay, and if I get a squeeze the last quick one here the 30 million restructuring charge I think he said he was going to translate that's pre tax going to translate into 30 million.
Pre tax.
Expenses, starting to whats in towards the end of 2020 would say middle with these.
Right the expense saves will start in 2020 and by 2021, we'd expect to be at the full level, but it's.
Roughly in that neighborhood of the charges 33 million pretax savings, we roughly in the neighborhood of 33.
And what segments, where we get those savings engine.
The majority of what we did this quarter was in the corporate segment.
So that's the majority of where the restructure charges were.
Great. Thanks.
Thank you.
Your next question comes from the line of Paul Holden see IVC.
Thank you. Good morning, two questions from me one is going back to Asia, and maybe getting a little bit more specific on the improvement and new sales strain.
Mentioned that that came from improves scale is there certain geographies where at this scale.
Hey approved driving that change and sounds like you assume that will we expect that will be sustainable. So maybe maybe talk about the reasons why it got improvements scale should be sustainable as well.
Yeah, Hi, Paul.
Sure.
So you're right to highlight.
We're improving our new business strain as you've seen we're driving some good growth.
Across the region really across all of our markets.
Back of strong focus on on distribution, both scaling quality.
And we've also got.
You know some strong product in the market a good product mix, we feel good about the profitability of these products.
As you know Asia.
It's a highly underpenetrated market when it comes to ensure on.
And so it's really a distribution gain on it's not it's not a pricing game in Asia. So we feel good about the profitability of the product centralized.
Ill continues to come through I, we're expecting to see this.
Benefit upscale flowing through in our new business strain.
In terms of where we're coming from.
Any matching our bigger markets, our Hong Kong and Philippine on both sides profitable markets and as we continue to build scale there, particularly you would expect some of the benefits come from there in particular.
Okay.
Second question.
A follow up on.
Central capital optimization, I think both Dean and Kevin mentioned potential M&A and M&A pipeline. So would appreciate any thoughts there I think the commentary in the past was certainly.
Your willingness to do deals is there, but you know for some for certain larger deals pricing was a challenge in terms your financial hurdles.
So wondering if there's any any update there and then just generally how robust you think the potential pipeline looks.
Paul It's a dean here. Thank you for your question.
I'll just take you back to the way, we think about M&A, we've talked about this before.
There are number areas in opportunities. We see first is can we assume a larger share that the joint ventures were already in you've seen US act on that in the past in India in Vietnam, and Indonesia. So as we look forward. That's that's one set of conversations and then there are lots of conversations.
Going on at any point in time around things that will strengthen all four pillars. So new capabilities. So think of greeno can infer read as squarely in that category new growth opportunities. So think of you know the acquire acquisition and Malaysia businesses in that category.
Or in some cases combinations of capability in growth. So think of the Oh, he be acquisition as driving both new capabilities and growth. So we keep looking at a pipeline of opportunities that are on strategy.
We ask ourselves you know what do we bring beyond checkbook to this business what does it bring to US why is the combination why is this business better off in our hands.
How do we grow faster together and obviously it has to clear our economic hurdles. So it's a pretty it's a pretty disciplined.
A framework for evaluating acquisitions I think we've been successful at identifying opportunities and then executing on them.
Bringing them in and achieving our targets and they've added a lot of value to the business and to the growth.
Potential for the company. So it's difficult to talk about any you know any obviously, we don't talk about any particular specific opportunities at any point in time.
Or about things that have come and gone in the past, but I'll just.
Kind of a general answer to your question around how do we think about it I would you say we continued to be actively engaged in a robust pipeline of opportunities that fit the kind of criteria I just described.
Alright, thank you.
Thank you.
Our next question comes from the line of Nigel de Souza with Veritas investment research.
Good morning. Thank you actually had a a follow up question on on the tax item. This quarter. So you pointed out investment income from tax exempt.
Assets and I was wondering if you could provide more color on know what those underlying assets represents in terms of equity or fixed income and how we should think about that going forward. So if market conditions continue to be favorable is strong.
Do you expect that benefit to continue and and vice versa. If we see softening of market conditions or does that benefit go away.
We but we've had these assets invested in this the tax exempt sort of basis for a number of years now and it really depends on investment returns sort of quarter by quarter, and we had strong investment returns this quarter, which which is the primary thing that drove us below our range. So I won't say I can't predict what the investment income was going to be on those.
So it sort of going forward, but the extent, we do have strong investment income, you'll see a lower tax rate related to that and that's what happened during the during the quarter.
And then last question related to taxes in the last quarter. You also had a the resolution of to favorable a favorable resolution of two tax related items. I believe you highlighted a an expectation for three cents a benefit from those items. So did that have any benefit or this quarter and do you.
Those items from last quarter to continue.
To benefit your effective tax rate going forward.
Yes, Nigel that that's correct, we did have that and we experienced the quarter.
Benefit that we expected to experience and you would see that going going forward as well, but that's included in our 15% to 20%.
Target.
Perfect. That's very helpful. Thank you.
Thank you.
Your next question comes from the line of Scott Chan with Canaccord Genuity.
Hi, Good morning, I think just going back to your comment on on the robust robust pipeline on the M&A side or the does that involve potential opportunities with with SLG lie.
Yes, that's one of the asset management entities that that that kind of aflac scale I guess in terms of assets, but it's also growing a lot faster than your and your more scale. Both businesses just kind of thoughts there I know you Didnt excel acquisition in the past, but I just kind of curious your thoughts on I'm not platform.
Got to thank you for your question, it's Dean <unk>.
Yeah, I first of all I'd say, we're really pleased with SLG I. It's it's [laughter]. It are you starting a business from scratch is one of the hardest things to do in business and the team has done a I think it just a terrific job building this business up to 30 billion a value EM and as I said, one and we talked about this.
Over the years, but its it is making a profit it's making a nice profit then of course as you know and once you went to kind of pass through that.
Zero number and start earning a profit theres theres good leverage there. So we're really pleased with the progress I have said before we have said before that.
You know if there was some way to add more scale to SLG through M&A that could be of interest to us.
As you know the reality is the.
The market. It is already quite concentrated in Canada is not not a lot of opportunities in that category and just as a reminder, SLG eye is a a solutions oriented business. It's it's got alpha generation capabilities to tactical asset allocation and other means the majority of the platform.
And as a sub advise platform. So so then when you go and say that is the model that we've got and you think about acquisition opportunities. It's not a big set so I I you know, we we see a lot of opportunity to grow SLG. Our organically. That's our first priority I think we've made great progress and it feels like we.
We've we've the we've just begun we've just begun opt to really get some momentum here and the best is yet to come.
Great and just a just a small question on Asia, the Sun life have any offices, and we'll hand or who buy.
They are you want to take that one.
Yeah, Hi caught up here.
So.
In our China.
Separate right, we have we have a branch in one.
Okay.
Okay. Thank you very much.
Thank you.
Your next question comes from the line of Humphrey Lee with Dowling and partners.
Thanks for taking my follow up question just on the topic of M&A I know Youve seen you talked about you're not going to comment on anything specific but.
Looking back at the time associated them, you've done couple of transactions there.
Actually building up you'll you'll probably a sweet if you will work to look at Oh, So life capital again like if you look at the overall product.
Switch that you have there is any capability all type of solutions that you will you will like to add to that platform.
Humphrey. Thanks for your question, Steve Peacher is going to take it Oh Humphrey. Thank you for the question it's Steve.
You know one of the areas that we are very strong in and have done very well and in terms of building a third party business is private fixed income on the investment grade sites, particularly strong.
Strength for the company, it's worked well for the balance sheet over the years and Weve as a result attracted a lot of investment interest from third party.
Institutional clients.
We don't have a large capability below in the below investment grade private credit space, which is obviously of increasing interest to institutional investors around the world and that is an area of interest we've mentioned that I've mentioned that in.
Before publicly along with infrastructure equity, we couldn't be more excited about the infrared acquisition, which fills that bucket.
And so if there was kind of one area that I would be interested in it would be the area in private credit below the investment grade line.
Got it thank you for the car.
Thank you we have no further questions at this time.
I'll now turn things to Miss Chalmers for closing remarks.
Thank you and I would like to thank all of our participants today and if there any additional questions we will be available after the call.
Do you wish to listen to the rebroadcast it will be available on our website. Later. This afternoon. Thank you and have a good day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating and you may now disconnect.
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