Q1 2020 Earnings Call
[music].
Based on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. The host of the call is Lee Chalmers Senior Vice President head of Investor Relations and capital Management. Please go ahead Ms Chalmers.
Thank you to get yet and good morning, everyone. Welcome to Sun Life Financial earnings Conference call for the first quarter of Twentytwenty.
Our earnings release 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 first quarter results by Dean Connor, President and Chief Executive Officer of Sun Life financial.
Following these remarks, Kevin strain executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After their prepared remarks, we will move to the question and answer portion of the call.
Other members of management will also be available to answer your questions on today's call.
Turning to slide two I draw your attention to the cautionary language regarding these forward looking statements and non IRS financial measures, which form part of today's remarks as noted in the slides forward looking statements maybe rendered inaccurate I subsequent events and with that I know.
I'll turn things over to Dean.
Thanks, Lee and good morning, everyone. Let me start with a heartfelt. Thank you to all of our front line healthcare workers and those providing essential services. Their response to this crisis has been her ROIC and we are a terminally grateful.
I also want to acknowledge the swift and bold actions taken by governments around the world to help bridge jobs families communities and businesses through to the other side.
Turning to slide four here's how sun life, it's been responding to the cobot 19 pandemic.
Our employees and advisors quickly mobilized to work from home to ensure that we continue to be there for clients, we were able to get our trading desks and call center stood up immediately and today 25, excuse me, 95% of our people globally are working from home.
Client service has continued to be strong.
We rarely talk on these calls about the functions that really act as the central nervous system of the company, including finance risk actuarial L M legal and compliance HR and technology.
These teams at Sun life has deep experience and expertise. They are the reason why we were able to move to work from home. So seamlessly they have adjusted rapidly to the new norm for example, with our first and perhaps not our last virtual quarter and process.
This remarkable effort is reflected by all of our employees and advisors around the world, they're laser like focus on clients, they're resilience their capacity to care for one another has been truly amazing to watch.
We've rolled out free virtual health care services to our Canadian employees. We also recognize that mental health is extremely important during these trying times and have created numerous resources for employees and families to support their mental wellbeing.
Our clients need us more than ever and we're doing our very best to accommodate and anticipate their needs. The pace of change has been tremendous for example in Canada, we decided to rollout virtual healthcare on mass through our Luminato health platform.
Doing a video consult with a nurse or physician support physical distancing and lessens the load on candidates emergency health services, while helping our clients manage theres their health during a stressful time and 2 million Canadians who are members of sunlight group benefits plan will be able to access this now along with their family members.
We expanded our AI driven underwriting model to cover more clients at larger face amounts with reduced need for lab tests, which are of course difficult to get right now.
In the US we made it easier for plan members to keep their benefits during temporary layoffs. We added cobot 19 to critical illness policies have extended grace periods for clients to big premium payments, we launched a series of town halls to explain to clients, how disability benefits paid family medical leaves and the government's new cobot 19 supply.
Port all work together.
In Asia, we've extended health coverage to include more hospitals and clinics offered additional cash benefits to cover hospital expenses expedited claims waived waiting periods and offered continued coverage for lapse policies due to quarantine or hospitalization.
We're working with regulators to expand the digitization of the end to end sales process, including replacing a wet signature with the digital one.
In Hong Kong now our clients can purchase designated insurance products anytime anywhere through the new digital sales system and indirect remotely with our advisors.
In asset management teams at MFS, and SLC management have doubled down on client communication, including the use of virtual tools with proactive outreach to individuals as well as webinars and other ways to provide our interpretation of market events.
We're working with tenants mortgage ores and other borrowers to find solutions when they can't meet their rent or monthly loan obligations.
We've moved quickly to design and launched two new products in SLC management.
We've also donated over $2 million to charities in the communities in which we operate to support at risk populations and provide access to food banks in the Philippines in China, We don't donated digital life insurance coverage to doctors nurses and other medical staff.
So we're doing our part to be part of the solution.
Today, our clients need us more than ever in our purpose of helping clients achieve lifetime financial security and live healthier lives has served as our son are bright light during these challenging times.
So with that let's move to our first quarter results on slide five.
Reported net income of 391 million was down 37% from the first quarter of 2019, mostly due to the impact of equity market declines.
Underlying net income of 770 million was up 7% over the first quarter of last year and underlying earnings per share were up 9% over the same period, we generated an underlying return on equity of 14.2% for the quarter and yesterday, we announced our common share dividend of 55 cents per share consistent.
With the prior quarter.
We came into this crisis in a position of strength.
We didnt know when the markets would turn or what would cause them to turn but over the past few years, we have been steadily reducing risk in our general account portfolio for example by selling down equities and moving up in credit quality.
Our lie cat ratio at SLF remained unchanged from December 30, Onest at 143%, a very strong level well in excess of the supervisory minimum and that includes $2.4 billion of excess cash at the holding company.
Our low leverage ratio of 20.7% provides for a significant capital flexibility.
And our four pillar strategy provides us with balanced and diversified streams of earnings and cash flows with a business specs that is less sensitive to interest rates than many of our competitors.
In the quarter, we grew wealth sales, 66% over the prior year and lot of this growth came from MFS, which finished the quarter with record sales driven by continued strong performance and continued investments in client relationships Barron's ranked MFS number one on its list of top fund families for 2020.
And more importantly for five year and 10 year performance MFS ranked second and fourth respectively, marking the 11th time in 12 years that it has ranked top 10 or better for five and 10 year performance. So a testament to their long term focus and ability to generate alpha.
Sunlight global investments, our Canadian retail wealth manager also had a strong quarter.
With $1 billion in net flows up 61% over the prior year a quarter in which the industry. Overall saw net outflows. This growth was driven by our multichannel distribution platform across GRM us segregated funds in mutual funds.
Improved wholesaler productivity and by continued strong purpose.
As of March 30, Onest 2025 of our granite managed portfolios received four star ratings and for MFS. Some advice funds maintain their five star Morningstar rating over the five year trailing period.
Insurance sales were slightly down from prior year at 776 million. This is mostly from lower large case group benefit sales in Canada as well as lower stop loss sales in the us that said the first quarters typically lower for stop loss sales and overall this business has seen tremendous growth as evidenced by its reaching.
Use $2 billion of business in force in the quarter, which is a doubling in size over the past five years.
In Q1 of this year, we combined our international in Hong Kong businesses in Asia under one leader and we're now calling this international hubs. This brings our high net worth businesses together. So we can offer our clients and distribution partners competitive solutions and services across the geographies.
Insurance sales in international hubs increased 148% over the prior year with increases from both Hong Kong and international.
Before passing it to Kevin I'd like to make to general points.
First when a crisis of great proportion occurs this time, a health economic and even humanitarian crisis, there's often a rush to judgment about how the world will be permanently changed.
Amid all the speculation Theres one thing we believe to be absolutely true the acceleration of everything digital from how we advise clients to how we sell to how we provide solutions pay claims and provide service will be a permanent benefit coming out of the crisis.
To be clear most of our retail clients will still want to work with advisors, but advisor productivity and effectiveness will be turbocharged through data digital and analytics at Sun life, We've invested a lot to digitize our business with industry, leading technology in many areas and we will leverage this time to further.
They are accelerate the development and adoption of everything digital.
And the second point is that realistically this will be a challenging year for financial institutions, and there will likely be reductions to sales and premium and AUM levels credit impacts and other experience.
Kevin will speak to some of the early signals we've seen through to the end of April.
I'd say that we've got confidence in our business model and think Sun life is very well positioned to navigate through to the other side, given our business mix, our risk stance balance sheet strength and above all our people and our culture and with that I'll now turn the call over to Kevin who will take us through the results.
Thanks, Dean and good morning, everyone I'd like to start by echoing Dean's comments uncoated 19, the global pandemic is having a dramatic impact on many peoples life and our thoughts are with all those who are affected.
These are very challenging times and Sun life remains committed to doing what we can to support our clients staff advisors and partners through this time, while managing the business to deliver strong results for our shareholders.
Turning to slide seven we announced reported net income of $391 million for the first quarter a decrease of 37% over the same period last year. Our reported net income was impacted by declining equity markets, partially offset by net interest rate impacts and negative ackman.
On an underlying net income basis, we we had earnings of $770 million, an increase of 7% from Q1 2019.
And underlying EPS was $1.31 up 9%.
Our underlying return on equity for the quarter was 14.2% the growth in underlying net income was driven by higher investment returns and business growth investment returns were driven by investing activity gains FX gains and improved credit experience, partially offset by losses on fixed income seed investments in.
Surplus and foreign exchange losses on economic hedges business growth was driven by expected profit growth of 10% and new business gains.
Mortality was a small loss on a few large claims and FM in the U.S.
Morbidity was overall positive, but down versus a strong first quarter last year expense experience was weaker on small variances across the businesses.
Other experience was down primarily related to some experience losses in our Asian joint ventures, and higher project spend.
Book value per share increased 4% from year end, mostly due to foreign exchange gains included in other comprehensive income.
Capital ratios remained strong with Q1 light cat ratios of 130% at escalate and 143% at SLF.
Unchanged quarter over quarter as the impact of lower interest rates was offset by share buybacks and the widening of corporate spreads that we saw in the quarter.
It is worth noting some of the actions taken by our regulator in response to covert 19 related to capital.
March 13th Aussie announced that they expect all federally regulated financial institutions in Canada to halt share buybacks and dividend increases for the time being.
Further on April nine Aussie announced changes to capital requirements under the light cat guideline.
These changes provide capital relief for payment deferrals on mortgages leases and other loans and on payments approvals for insurance premiums to policyholders by policyholders.
This means that deferrals will continue to be treated as performing assets and therefore will not attract higher capital charges.
All three also granted relief for participating lines of business, reducing the impact of a disk continuity in the light cat ratio caused by a scenario switch related to interest rates.
This change effectively smooth the impact of a scenario switch over six quarters, you'll recall that in the third quarter of 2019, we discuss the positive possibility of switching interest rate scenarios within our sensitivities, creating a discontinuity in light cat results that would've caused an immediate drop in our ratio.
While we did not experience a shift in the interest rate scenario in the first quarter of 2020, we did adopt the new guideline.
As less cash at the end of March was $2.4 billion, a slight increase since Q4.
Prior to Ospreys announcement, halting share buyback programs, we had repurchased $200 million worth of shares in the quarter under and see IB.
Our financial leverage ratio was 20.7% down quarter over quarter, reflecting growth in total capital primarily related to accumulated OCI.
Assets under management finished the quarter at 1.0 to three trillion dollars down by $76 billion, mostly from unfavorable market movements, partially offset by the impact of foreign exchange translation and business growth.
Turning to slide eight despite a challenging economic environment. We had reported net income growth in three of our four pillars and underlying net income growth in all four on a reported net income basis Canadas reported reported a loss of $42 million in Q1, reflecting unfavorable market related and accurate impacts.
Market related impacts were mostly driven by the decline in equity markets, partially offset by the impacts of credit and swap spreads.
Canada's underlying net income was up $256 million was up 8% driven by business growth and higher investing activity and FX gains, partially offset by lower net investment returns in surplus unfavorable expense experience and unfavorable morbidity experience in group benefits.
We use saw 32% increase year over year in reported net income driven by favorable market related impacts predominantly from widening credit spreads, partially offset by unfavorable ackman impacts.
In in enforce management for underlying net income the U.S. had 7% growth driven by higher investing activity higher FX gains and new business gains, partially offset by unfavorable mortality experience and and positive but less favorable morbidity experience.
Last year, we had elevated favorable morbidity experience in the first quarter of 2019, which we noted would revert to the mean over time.
The after tax profit margin for group benefits in the West was 6.8% on a trailing 12 month basis compared to 7.9% in the prior year.
Asset management reported net net income grew 9% driven by favorable fair value adjustments on MFS share based payment awards, partially offset by higher acquisition and integration costs related to the biggio acquisition and the pending infrared transaction, our asset manage businesses grew underlying income by 7%.
Driven by higher average net assets in MFS and higher income and Nestle fee management, driven by the Biggio acquisition that closed in 2019, partially offset by lower net investment returns in MFS seed capital, mostly driven by widening of credit spreads.
Asia reported net income grew by 25% stemming from growth in underlying net income, which increased 27% over the same period last year. This growth was driven by favorable credit experienced new business gains primarily in international hubs and improved mortality experience, partially offset by unfavorable joint venture experience.
Slide nine provides details on our sources of earnings.
As expected profit of $816 million was up 10% year over year from a from a continued business growth, particularly in our Canadian and asset management businesses, which increased 16% and 12% respectively. Excluding the impact of currency and asset management expected profit increased 12% from the prior year.
New business gains were $6 million in Q1 compared to the new business strain of $11 million last year, driven by higher gains in our us business and lower strain in Asia as result of higher sales in international hubs experience losses of $111 million pre tax were largely driven by unfavorable market related impacts.
Primarily from the recent decline in equity markets in interest rates, partially offset by the impact of credit spreads.
Experience losses also include unfavorable credit experience policyholder behavior expense and other experienced offset by investing activity gains.
Maxima of $66 million pre tax for the quarter related to an increase in the provision for adverse deviation for fixed income assets credit spreads the sharp increase in credit spreads during March bank credit spreads at the end of the quarter were outside the historical range, which drove higher credit spread experience gains during the quarter the increase in credit spread provisions power.
Mostly offset these experienced gains in our source of earnings.
Other in our source of earnings include acquisition integration and restructuring costs, partially offset by favorable fair value adjustments on MFS share based payment awards.
The restructuring cost we recorded in our corporate segment includes severance cost as a result of various ongoing projects initiated initiated in the fourth quarter of 2019 to simplify our organizational structure and drive efficiencies.
Earnings on surplus of $160 million were down $9 billion compared to the first quarter of last year, driven by lower net investment returns on surplus assets and losses on seed investment returns as a result of widening credit spreads partially offset by higher FX gains.
Effective tax rates on reported and underlying net income were 42% and 18.5% respectively. Our effective tax rate on reported net income reflected the impact of tax exempt investment losses.
Primarily driven by the widening of credit spreads.
These losses were offset in actual liabilities on an after tax basis.
On an underlying base was our effective tax rate was within our range of 15% to 20%.
On slide 10, we show our sales results for the quarter.
Will accompany insurance sales for the quarter were relatively flat year over year at $776 million with Canadian sales down 19% due to the lower large case sales in our group benefits business and lower third party individual insurance sales first quarter sales in the US were up 2% on a constant currency basis from the same period last year.
As higher employment benefit sales were offset by lower sales in our medical stop loss business.
We had strong individual insurance sales in Asia up 22% on a constant currency basis, driven by strong growth in Hong Kong and international as well as the Philippines.
Well sales across the company increased 66% year over year as Ken had strong sales across most product lines, including Drs, which saw a heightened retain sales MFS saw high retail and institutional sales, which drove the 65% growth in asset management sales on a constant currency basis.
Overall, MFS experienced net inflows of use $1.8 billion in the quarter, a significant improvement, reflecting the strong retail net flows and moderate outflows from institutional clients.
During the last two weeks to the quarter MFS saw retail flows slowdown due to market conditions, but this slowdown was offset by better institutional flows as some clients rebalance towards equities.
Finally, well sales in Asia increased by $409 billion or 22% year over year, excluding the favorable impacts of foreign exchange translation, driven by money market sales in the Philippines, and the pensions business in Hong Kong.
Total VNB was $380 million in the first quarter of 2020, a decrease of 1% compete compared to the same period in 2019, reflecting lower VNB in the us on pricing margins and Canada from lower insurance sales, partially offset by higher VNB in Asia from higher sales in international hubs.
Yes.
Turning to slide 11 operating expenses of $1.7 billion were up 3% on a constant currency basis controllable expenses were also up 3% compared to the prior year and include our investments in digital as well as cost to support our growing businesses.
Restructuring costs of $37 million. This quarter are in addition to those we recorded in the fourth quarter of 2019.
Cumulative cumulatively, we expect this will result in expense savings of approximately $85 million pretax with some savings starting to come in through 2020.
In addition, we are taking a look at non ft related expenses.
And to achieve savings such as in travel consulting and flowing down some projects in a way to save costs during the year.
Turning to slide 12, we've included a high level view of our invested assets as at the end of the quarter with some highlights on our debt and mortgage and loan portfolios. As we are faced with heightened uncertainty on potential credit impact in this recessionary environment overall, 97% or fixed income portfolio is investment grade.
And our triple B exposure is skewed towards the higher end in terms of quality.
35% of our Triple B exposure is in private debt with strong collateral and covenant protections.
Our portfolio of invested assets is well diversified and have higher quality, which is a testament to the work we've done over the years to de risk the balance sheet reduce our exposure to volatile sectors and developed strong private loan origination capabilities.
Turning to slide 13, we provide some additional details on sectors that we believe post higher risk at this time.
We've been preparing for late stages in the credit cycle for a while now but we certainly did not anticipate the current crisis, we've taken deliberate and sustained of steps to de risk. The portfolio. This includes reducing our triple our triple B minus rated securities by $1 billion, and reducing our exposure to the energy sector by over 10%.
The exposures. We have included here are those we expect to be most affected by the slowing economy, social distancing measures and lower oil prices.
This includes our oil and gas exposures. In addition to aviation hotels restaurants, leisure and certain real estate holdings.
Approximately 97% of our debt securities in private loans across these sectors are investment grade with approximately 47% Triple B rated.
As I mentioned before a good portion of our Triple B rated portfolio is in private loans, which are well collateralized and have strong covenants against them.
Turning to slide 14, we are actively monitoring the impacts of cobot 19, and we know that a lot of you're interested in what April looks like for sales claims and other items impacted by the cobot 19 crisis.
We think it is important we give you a view into what we're seeing throughout April we've been able to continue sales activities using digital tools and processes overall in the month of April sales were mixed with total individual insurance sales and wealth individual wealth sales at approximately 80% and 90% respectively of the prior year we saw.
Some markets growing as a result of digital tools pre existing sales pipelines repricing and returned to work efforts in China, and Hong Kong, but some markets like the Philippines, India, Malaysia, Indonesia saw significant declines in April from strict quarantine profile protocols impacting face to face and bancassurance.
Sales for group benefits and pensions April premium volumes and assets in force were relatively unchanged from the end of first quarter.
As a result of the mixed experience and uncertain returned to work time frames, the and economic conditions Q2 sales levels remain uncertain at this time.
To date, our mortality and were.
Entity can cases has been small amounted to less than 5% of our monthly average for mortality and disability claims paid.
And some of the additional cobot 19 claims of the additional cobot 19 claims experience has been offset by lower claims in other areas.
Q2 experience remains uncertain and will be greatly impacted by the jurisdictions and industries, where we do business and the success. These jurisdictions have in reducing the spread of the virus to.
To support our clients, who may be facing financial hardships, we've extended grace periods for premium payment for individual insurance and group benefits clients for up to 90 days.
This extension of Grace periods has not created significant impact on premiums should we experienced a prolonged period of non payment, we may see increases and lapse and other policyholder behavior.
Similarly, similarly for our borrowers and real estate tenants, we have granted interest principal and rent payment deferrals on a case by case basis. During the month of April we granted payment deferrals of just less than $15 million with additional request currently under assessment.
The month of April saw MFS, AUM grew 8% to us $471 billion.
Going forward there were many potential impacts that could result from a prolonged economic downturn and the path the virus might take which may affect our business in different ways. This includes the impact of markets on our wealth and asset management businesses, the impact of downgrades and impairments on our asset portfolio or continue to operate in an even lower for long.
Longer interest rate environment, we're actively monitoring these assets and the impact and the impact they may have on our results.
To conclude we came into this pandemic with strong capital and liquidity positions supported by a low financial leverage ratio strong like at ratios and $2.4 billion in excess cash and other liquid assets at March 31 2020.
This coupled with our diversified business mix strong risk management framework and track record of bringing digital solutions to our clients underpin why we believe we are well positioned to manage through this situation.
With that I'll turn the call back to lead to begin the accumulate portion of the call.
Thank you Kevin to capture all of that are to ensure that all of our participants have an opportunity to ask questions on today's call I would ask each of you. Please limit yourself to one or two questions and then to re queue with any additional questions.
With that Dickey chat please pull the participants for questions.
Thank you at this time I would like to remind everyone wanted to ask your question. Please press star one.
Telephone keypad, we'll pause for just a moment to capacity roster.
Your first question comes from the line up John Aiken with Barclays.
Thing.
Given the.
The measures taken by the regulator in terms of limiting the demand increases in buybacks.
How are your capital allocation priorities shift and has there been any guidance from the regulator in terms of restricting potential M&A.
John It's dean Thanks for your question.
I think the.
As you note AOS fee and Kevin referred to this AOS fee.
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Change the rules I guess in March two.
Limit.
Dividend increase to restrict dividend increases and buybacks I mean, I think the way we think about that is.
Buybacks have been.
One aspect of capital allocation for Sun life in the past and.
And of course right now it is moot because AOS fee has put these rules in place, but when that requirement is eventually lifted and I can't say when.
I don't think anybody can say when but when that requirement is eventually lifted.
Share repurchases will be back in the lineup as one of the tools, we use to to allocate capital as far as M&A goes I think.
The pro we continue to be.
Looking at opportunities that fit our strategy that tick all of the boxes that we've talked about before I think fee in this environment.
It's natural that we would evaluate those M&A opportunities.
In light of both our sort of base case scenarios NR severe stress scenarios as you would expect weve built scenarios for the business going forward, depending on how things unfold and we would make sure that we think about these opportunities in light of both both the base case and the severe case scenarios.
And I would expect that to AOS fee would want to see those kinds of analyses says as we go forward with any opportunities we might see so I'll stop there.
Thanks, Dean just just to reiterate though side of your.
Your own appetite no explicit restrictions on M&A from the regulator.
Correct. If they had put the menu would have seen I expect you would've seen them published that and you've not seen there.
Great. Thank you very much I'll re queue.
Your next question comes from the line of Steve Carell with capital.
Thanks very much.
Couple of questions, maybe starting with hedging can you talk a little bit about.
The how pleased or were there was any issues with the hedging program just given the extreme volatility we saw this quarter and thanks for the expanded disclosure in the.
In the appendix.
I wanted to ask the $57 million of basis risk that's about 10% of the equity market impact is that pretty normal or does that pickup in times of volatility.
Now I'll leave it there.
Steve This is Kevin strain I'm going to.
Given the first part of this answer that I'm going to turn over to Kevin Morrissey. If you look at the that basis changes, it's about half of that as from fund performance and so the underlying funds.
Underperformed the indexes and about half is from hedging volatility, which kind of gets out your first question and I'm going to let Kevin go into a little bit more detail on how the hedges performed in addition to that.
Hi, Steve This is Kevin Morrison so.
I wouldn't attribute kind of any proportions tens of basis risk.
It's preview iOS in progress on what happens in the quarter.
I would say overall, we were very pleased with the hedging programs they were.
Quite successful all our metrics, we're very much in line with our expectations and give you a sense for the size underperformance.
Thrill liability increased by about a billion in the quarter remained into market movements and the hedge pay offs covered almost all of that so we were very pleased with for their results overall for for the hedging including the basis for us now.
And is there any expectation that hedge costs go higher at all after the market decline.
So there is an increase from our seems it's Kevin again, there is an increase in the hedge cost. So we have a dynamic hedge program. So theres rebalancing call Henry higher volatility in the market.
The cost did increase but thats kind of a natural consequence saw Jude.
That hedging program and it didn't turn out to be a huge number in the quarter, but it is something that was elevated and just natural consequence of having that type of dynamic hedging program.
Okay, and then last one if I could add the MFS results were very solid solid obviously, but I just want to basketball performance I would've thought that the lipper metrics that you give us regular we would.
Rise on a significant market correction, but the I note that they moved.
A lot, but they did deteriorate, especially of the shorter ended so just wondering is this at all related to the resilience of sort of the bank stocks is there anything we can taken away from that.
Helpful.
Hey, good morning, Steve This micro bearish.
Yes, when you look at obviously, we we direct.
Everyone to look the longer term numbers, we think thats more relevant to what clients are looking at but what I would say on the other shorter timeframe.
And our credit focus and fixed income we were impacted by.
The significant widening of spreads that we saw in March and we would expect overtime, the particularly given the backstop that the fed another central banks have provided the yields will come through the portfolios.
The way that those numbers are constructed are based on a share the share class, which has distribution fees, we started showing that a decade plus ago.
Most of that Ace share class assets are a lot of there aren't fixed incomes with skews. The results. When you look at it based on where clients are the client experience if I use our institutional shares which doesn't have the trail commission. The one year number would be 91% are outperforming. So some of that is just a function of the share clash that we're pulling.
Relative to the industry share costs.
So we're not at all concerned about performance Lontra performance could you just to be strong where we've seen a little bit of underperformance on a fixed income side, we think we'll come back overtime through yield in the portfolios.
Great Thats helpful. Thank you.
Your next question comes from Doug Young with Janney capital markets.
Good.
Good morning.
Just first question back to the disclosure around 80 to 90, we're April sales were in individual insurance.
And well throughout 80, 90% of last years levels, you gave a little bit of color and I didn't catch it all I apologize.
For Asia can you talk that more broadly by geography, Canada us and little more granularity in terms of.
What you're seeing.
So I'll also note that dugan, they're going to let Leo during a little bit more detail on Asia, and stock and Chuck and Dan can.
Talking about their business groups as well, but that that comment was related to overall across the company in what you do see is that jurisdictions that are sort of going back to work in coming out of the the work from home as social distancing environments like China, Hong Kong are picking up and then the jurisdictions.
That are experienced strict quarantine are declining we are doing a lot on the digital front to support our.
Agents across the world selling including electronic signature so a lot of regulators.
We're not in favor of electronic signatures up until October 19, and are becoming much more open to that and we think that thats, a really really good development for the industry going forward. So we saw that happening in a bunch of different areas, but I'll, let Leo talk a little bit more on the experiencing in Asia and may be Joc and Dan can add some color.
Hi, Doug its Leo here.
So for the experience in Asia, what we saw overall is pretty consistent with what Kevin described as global level.
For April our sales were about 80% of last year on the insurance side and about flat to last year on the wealth side.
And.
What we're experiencing is very similar to what Kevin just talked about basically we've got a barbell situation across our different markets.
Got certain market.
That are out of locked down.
And where as the economy has started to pick up again and we're activity is strong for for example in international hub.
In China, and yes now.
We're seeing some strong sales and then you've got other markets like the Philippines, India, Indonesia, and Malaysia, where we're still in knockdown.
Download.
And in those market says, we're seeing more depressed sales compared to prior year.
So really what you're seeing across the region is.
You've got basically the impact of Lockdown that one day factor the second impact is.
Once you added lockdown, how quickly sales and the economy pickup again on the basis of places like Vietnam or China, We're actually seeing are reasonably strong pick up.
And we think we've used our time well over the Q1, two really strengthen our non face to face capabilities.
To our advisors that salons that our bank thank our partners.
As well as pushing recruiting across the region. So we're we're driving scale aspect of your Caesarstone uncertainty.
Based on.
Economic environment and and the restrictions.
With social distancing.
Doug This impact maybe I won't repeat all that linearly.
Seven have said, but perhaps there hasn't been enough color on Canada as you know.
As we have the individual but also the group businesses.
In GB and GR house, once we aren't seeing right now.
Employers we refocused on.
During the quarter crisis.
So there is indeed lower level of activity.
Sorry, John.
Thanks Jack.
Thank you.
Keep going away from the phone, it's making quite a loud noise.
Okay.
Yes, sorry now.
Okay, Yes, I think I think thats.
Let me I'll stop site than year.
Doug were impressive adoption of your typing, yes, I will be a secretary and my second career here, So yes [laughter].
So saga.
You want me to start at the beginning I guess I'll I'll just give you some additional points that werent brazenness seemed like Kevin Leo.
Another group side in Canada, both GBM Grl.
What are we saying goggans.
Our clients are really busy managing their business equal head right now and we are seeing.
Lastly activity now.
It's not just less activity for us it's less activity in my view across industries. So so while there is a potential impact on sales, but I would expect similarly.
We will have positive impact on retain on retain business. So thats the additional.
Comment on how we give you as Kevin said lots of deployment of digital tools into along.
And.
In April impact has been minimal now.
We have all.
Says.
The question is how long is this nonetheless.
We'll start seeing.
More of an impact overtime, but at the moment that would be what I would comment on April.
And Dan if you had some some color for the use.
Yes, let me just add a little bit guys. This is Dan Fishbein on April.
Interestingly, what we've seen in each of our businesses in group in our full scope business and stop loss.
Was increased sales in April 2020, compared to April 29 team.
It was up modestly in grew significantly actually in full scope and and quite significantly in stop loss.
Some of that is that April may be tends to be a somewhat smaller months. So you can have some volatility.
But clearly we were happy to see that sales are holding up and even more than that now we are looking very closely pipeline as well.
Our group business pipeline is down significantly.
So thats suggests we could see lower sales in the next few months interestingly. The stop loss pipeline is stable has not drop suggesting that that's a business where sales activity may very well.
Continue and as John said, though if we have lower sales in group.
That is an industry wide phenomenon because human resources departments are very focused as they should be on other things right. Now. So it also means that our existing business wouldn't be going out to bid as well. So while we might see lower sales. We would also see lower lapse rates in our own business as well.
And Doug, It's Kevin I would Kevin strain again, I would say that.
Well, we've given you April April is one data point and its six or seven weeks into the pandemic for most of our businesses, our north American businesses and so it may not be reflective of what we will see going forward and it may be different by jurisdiction and by sector and you know do you have.
Second wave and some of those types of things. So so we think you know what we can say is that we're we're doing everything we can to continue to see sales occur.
To manage that to create digital tools and to to work virtually.
But there can be a lots of plausible outcomes going forward around sales, depending on the path of the disease and the economy.
Perfect I appreciate the full some of the answer thank you very much.
Thanks.
Your next question comes from the line of Gabriel Jeno.
National Bank financial.
Good morning ounces per Smolenyak typewriters side.
First of all thanks for the disclosures.
A lot of enhancements through that are very helpful. One thing I want to go over in your corporate 19.
No business impact type of.
Items.
You talk about the policy behavior and other.
Mortality morbidity and get my head around that but the.
Can you tell me, what you're thinking with regards to lapse and other.
You know in some cases loss could be good sometimes it can be bad and then the other what's what are you guys have mine where people will be up.
So Gabriel it's Kevin Kevin strain and.
The what we're trying to say there is that.
Yeah, we've been offering premium deferrals, right and frequent deferrals of up to 90 days and we've done that and many locations and extending that.
And you know that gives people a chance to.
If they're out of work for a short period time or on furlough or those types of things to to get a chance to react to that and get back to paying or get back to work and so if if we're under extended period, where there is.
Drops in unemployment rates and those types of things in premiums can't get paid you might expect that there'll be more or less lapsation and then on the group benefits business.
If you see unemployment and terminations, you'll have less members and that would also have an impact so were in those impacts on the group benefit side.
We will likely be different by sector in jurisdiction. So we're just sort of pointing out that it's too early to say, whether this will have a significant impact on lapse or may be.
Changes in vestments or those types of things policy loans that type of thing.
Okay, but but you're.
I mean from a lab standpoint could go either way like it could be good could be about design.
That's that's correct it depends on the product right.
Okay. So next question is on the.
On credit and I'm wondering if there's some sort of a rule of thumb.
So we have a $15 million $50 million net credit loss experience loss on on a gross basis 39 million or 40 million was due to downgrade.
Is there anyway to quantify.
How many on that was associated with because I really don't know how to connect the dots between downgrade in some sort of earnings impact.
On on the downgrade front, especially and then yield enhancing games big numbers this quarter.
With wider spreads so Matt so the revaluation is that something that could potentially company with a higher rate.
Okay. Those are it's Kevin strain again, those are big questions Gabriel So I'm going to start with credit.
And I do want to point out some things that it's.
Britain important remember that we are under that Canadian asset liability management method IRS for and we we don't fall IR for US nine and we do have different sort of accounting treatment than the U.S. and if you think about that our provisions for credit are inside of the actuarial liabilities, where we hope to reserve where we holder.
Reserve of $2.7 billion and that includes the best estimate assumption and the P. fat.
That reserve also includes.
Provisions for credit rating and create credit downgrades and you saw that we had a hit in the quarter of $39 million remade related the downgrades that was actually a small number of downgrade to was that it was in a big number and in fact in April we continue to see a small number of actual downgrades, but we that gets provided for thats part of the 30.
9 million that writing the reserves and then in addition to that we had an impact of $1 million on impairments and those impairments are.
Again, a small number of of.
He said that that part goes through investment income.
And so it's really good to think about.
These in two different portions.
This does that help.
Yes, well those small number of longer lead I get the mechanics of how it works or just.
Hello.
And then the overhead.
On the yield enhancements you have so is so in terms of in investing in FX gains.
No there was a decline in interest rates of course during the quarter and that allowed us to sell some fixed income assets again.
We are able to take those gains and in some times.
The same time, the credit spreads widen right and there was some really good names that came out with with very positive credit spreads and we were able to two to acquire some fixed income assets that we put against what liabilities that were high quality names with with good credit spreads and so you actually got sort of both impacts we've got the delay.
Lower sort of base interest rates, creating gains on on the more public sort of.
Investments more more.
Government investments and then you've got the positive impact of the widening spreads and some really good names were able to investing.
Yes.
Good afternoon.
Well you know interestingly it was it was outside of course in the quarter.
If you looked at the quarter average ending this quarter. It would have averaged $33 million and I think thats, probably a good way to think about on average what we'd expect from investing gains at the same time you should remember this quarter that we did see the widening of credit spreads impacting some of our seed investments in fixed income.
We've been ceding some investments in sunlight capital.
And we.
And we've been ceding some fixed income investments in MFS as part of their strategy and when the credit spreads widened.
We actually took a loss on the on those investments so it's a bit of a balance between the investing gains and the.
And the seed capital losses was the impact of the of the credit spreads.
Thank you.
Your next question comes from the line of Meny Grauman Lynn.
Cormark Securities.
Hi, Good morning question, we know that Asia is ahead of us in terms of dealing with a pandemic and coming out of the Lockdowns. So I'm just curious given the spread of your operations. If you look to Asia as a guide for what's in store for North America for your business are there any lessons that you can start to draw from them.
Our Leo do want to take that.
Yes, Ken I can try.
Although sometimes it feels like Asia is now behind North America in many ways. If you look at.
The scale and.
Scope of the pandemic North America.
But definitely we went into this sooner.
And what we saw obviously is quite different.
Responses.
Across the different market, even within Asia, I think you're seeing the same thing in North America between states and provinces.
What we learn from business standpoint is obviously.
In situations, where the market like Hong Kong, where the markets don't when complete loss downturn places like like Vietnam. As a business has continued to run reasonably well advisors are out meeting with clients and our client demand is actually quite strong.
What we are perceiving is that.
The demand for our products have never been stronger the awareness of their needs by clients has never been stronger. So I think thats one learning in places where.
It's still possible across market.
A second thing that we're seeing is that.
In.
In markets like China, where the markdowns were were effective and where the economy. We opened and people went back to work, even though they were social distancing types of norm still in place we saw very very sharp rebound in sales.
And so.
In markets in North America, where that maybe the pace I think there some potential.
Optimism to to see for the industry and then the third thing that I'd say is that.
Across our markets were seeing digital everywhere being the norm.
Plan are you seeing.
Our applications our portal.
More than four our advisors are also leveraging our capabilities a lot more and I'd expect that behavior will continue to.
Okay.
Post crisis.
So investment in digital which is something we've been doing very very actively.
I think will pay off and then the final thing that I've mentioned is.
Unemployment has been going up across markets in Asia and for US that's allowed us to continue and be quite aggressive on recruiting of advisor.
And it's allowing us to to find very high quality candidates for our our agencies and so I could see that also being something that ports over to other markets.
Thank you.
Operator, we go to the next question.
Yes. Your next question comes from David Matson Maiden.
Just a question for Dean just following up on M&A, just wondering I guess, how you view M&A now compared to the end of 2019.
Where sun life is definitely still in a very solid capital position and with $2.4 billion of cash at the Holdco and a strong SL way like at ratio valuations have come off a bit.
Since the end at 19, do you foresee being a bit more active as a result.
David Thanks for your question I would I would say excuse me.
I would say that we continue to be active.
Looking at opportunities around the world across our pillars that fit our strategy and took all of our boxes.
We you know we entered this as we said and as you've noted with a very strong position very strong capital position.
Anything we look at will evaluated against.
Our different scenarios, including a severe stress scenario one of the things that we're watching for is.
To what extent as the opportunity set widening and we saw that during the global financial crisis more things came to market there were fewer bidders.
The.
Those with strong.
Balance sheets and strong financial positions.
I had the capacity to execute on M&A.
So it's too soon to declare anything on that particular point, but thats something that we're watching for as well, but I would say we continue to be active in in pursuing opportunities that fit our strategy and we will see with that takes us.
Understood. Thanks, and then if I could just ask a question for.
For Mike on MFS, just in terms of.
How do we should think about operating expenses within Msas, where they were up about 6% year over year, we take out MFS share based comp I.
I guess, where where do we think where should we think about that trending over the rest of year, just given market levels.
Hey, Good morning, David This is Mike.
No.
Comp.
GAAP expense, which is our largest expense will come down as.
Profitability comes down depending on where the markets settles and for the year.
We're going to be pretty cautious on obviously discretionary TNT is an expense that's effectively going to zero.
And some of our other distribution costs that support clients have come down.
And so costs will naturally come down.
We're not looking to to.
But labor as part of this or or cut headcount because clearly theres. Another side to this and people give us your money to manage for hopefully a long period of time and so we're going to continue to look through that and so expenses will come down naturally.
But they won't come down.
Will decline quite as much as revenues tend to decline. So there is some negative operating leverage on it and so I think for the balance of year. It's hard to think about what earnings look like only because it depends what the market does and it depends on when the market either goes up or goes down from a timing perspective, and so we think about this looking through looking over the next three to.
Five years, having expense base that we say makes sense through that period of time to market will go up for periods of time, it'll go down for periods of time, and we can flex down discretionary costs.
During periods like this but more important thing for us is kind of think about in a multiyear basis.
Got a great. Thanks that makes sense, if I could just sneak one more in Mike.
The 471 billion of anyway at the end of April and there is I guess some mentioned in the prepared remarks on the flows in retail which are clearly been very strong those kind of tapered off at the end of March and were offset by higher institutional outflows are offset by that.
To a large extent.
I'm wondering if you can just maybe talk about what you seen through the end of April on both are just on the net flows project, we're thinking about both sales and then redemption activity.
Yes, I mean, I guess I would characterize it I don't know what.
Ken maybe Kevin can jump in when I'm done we've made public but I was just characterize that the market and this is true when you look at industry sales in April.
Moving into the year January and February we are decent industry months, and we obviously outperformed that March was a big outflow month for the industry in April if you look across the industry looks more normal than what we saw happened in March and I think it's important to say the for the quarter is.
We had record gross sales.
For the quarter, we actually had a record gross sales for March relative to other markets as well. So we continue to see really high activity. When we look at the net flows across the industry. If you look at the top 25 players in the U.S. There were only three there were net positive in the quarter MFS was one of those.
The other managers tend to be fixed income oriented and we're a multi product selling a lot of equity. So we're clearly gaining share within the marketplace and when you look year to date of the 700 plus providers in the U.S. selling product one number three and net sales through the end of the first quarter and so.
We could we continue to think that the industry is going to consolidate in those active managers that the that our counterparties have confidence and we're seeing that in our business. We saw that the first quarter. The flows across the industry has normalized some april and if the market stays here, we would expect that to continue to happen.
Mike Great, but I think I think you've covered all the aspects I would cover we don't disclose flows on a on a monthly basis.
And so I think we did give the number and MFS does always published the number for a AUM at the end of each month than we disclose that.
Great. Thank you.
Your next question comes to pass from the line other Sumit Malhotra of Scotiabank.
Thanks, Good morning couple of questions on credit to start for Kevin.
You touched a little bit on the since you're giving some some update in April for parts of the business.
Would you be able to comment I think you said theres been downgrades of continued but in aggregate.
How has your credit experience trended.
Thus far in Q2 unrelated to that when you were going over the slides you made mention of.
Your your private loan portfolio.
Just wondering because there's different pieces along as you have the mortgages. Obviously you have some corporate loans are these.
Marked in terms of experience the same way is.
The debt Securities was in terms of downgrades effect on the most or is this based more on.
Actual default experience and then impairments.
Okay. So sumit ill start with the first part and then going to let Randy Brown.
Give some more detail on the privates and how we do the ratings in the private says and as I said you know.
For the first quarter it in a in Q1, we reflected everything we saw in terms of downgrades an impairment it with a relatively small number and in April we continued to see a relatively small impact for per downgrades and impairments going forward that can be a lot different right remember that were just six or seven weeks into.
Cobot 19 crisis in North America, which is the biggest part of our balance sheet and so we're.
Under our accounting treatment were reflecting everything we need to and can reflect inside of the actual liabilities and inside of the impairments and and those are the numbers that you're seeing there relatively small at this point, but it is something we're we're watching really closely and Thats why we gave the additional information on on sectors and on some of the.
The investment the Triple B ratings and those types of things. So so maybe I'll turn that over to Randy to just add some detail on the privates and how we do the the ratings.
Okay.
Thank you Kevin and thank you for your questions. Matt. This is Randy Brown, so within the private asset classes. The process is exactly the same incidents where the public asset classes, we look.
Really track to exposures every day and.
Theres downgrades, we look at how we look at that security also answers impact on cash flows than we looked at them from an impairment basis. So remember.
Downgrades and look forward looking impairments are more real time, so we continue to follow that process.
We did note a couple of things Kevin spoke about in his opening remarks.
Which is we have taken.
Significant opportunities de risk portfolio in prior periods, which included.
Reallocating some credit exposure from public to private the reason for that is that we.
We have covenant protection, where the senior secured position typically in our private portfolio relative to public switch or unsecured.
And so we have a long history.
Of experience in the asset class in originating them internally and if you look at that the.
Credit experience is significantly better than comparably rated public bonds.
Randy I asked because on page 24 of your supplement you do give us some.
Information on impairments and allowances for the the mortgage on loan portfolio with the privates be captured in that loan bucket there because.
At least sequentially. It doesn't look like there was there was any deterioration at all.
Yes.
Yes, it would be.
Right. That's that's something we'll we'll monitor going going forward and then last one for me back to Kevin on the assumption change in the quarter related to the the widening of credit spreads.
Just wanted to make sure I understand how this.
Reflects in the experience going forward so by making this change you have.
Essentially.
This is Ron Germany is but mark to Mark has the widening credit spreads how would that affect the yield enhancement experience gains that the company has consistently derived from.
Being able to to pick up additional income in the market are those two related in any way or am I am I not that came out this correctly.
So soon but I'm going to turn that over to Kevin Morrissey.
Okay.
Thanks for your question some of its got some.
That so those two are not related so the akamai change in the quarter was related to the feature reinvestment that we were assuming in the valuation and so what we did as we increased our perficient tractors deviation related to our best estimate assumption a greater level of uncertainty given to.
The credit spread volatility.
We felt it was prudent to strengthen down a bit.
As credit spreads widen you we saw significant gains from investing activities that will still.
That will still be available and that will not be impacted by this assumption.
This assumption is really related to that forward looking assumption in the actual reserves and it will release naturally.
If credit spreads revert back to more historic levels as well.
That's helpful. Thank you for your time.
Your next question comes from the line of Darko Mihelic with RBC capital markets.
Hi, Thank you just real quickly also wanted to sort of focus on credit here.
When I look at the page 24 of your supplement you were just talking about Sumit.
I noticed that the sectorial went from 20 million to 21 million quarter over quarter, which in the Grand scheme of things is basically immaterial. So the question is is this perhaps something thats sort of on autopilot right now and then later you do a deeper dive on credit and there's a potential here that you will have to build a much low.
Harder So total reserve, saying Q3, when you do your normal deep dive or is in fact, the 21 million dollar sectorial provision against a 50 billion dollar portfolio actually adequate right now.
The Darko I'm going to I'm going to say that that's the question is really for Kevin Morrissey, So I'm going to let Kevin Morrissey.
Start with the answer and Randy and I may add some more detail as these sort of works through that.
Hi, Darko its carbon Morrissey.
So I'd say from a reserving perspective, a couple of things need to provide a bit of context to what we're doing so we are monitoring for both the claims experience. Some cosan 19, and also the resulting economic.
Streams that we're seeing as a result of depend garlic and when we're setting our assumption thats based on a long term time horizon and it really is meant to be appropriate through the economic cycle.
So, although we haven't seen anything significant in terms of actual experience so far in Q1.
Engine equal it's been fairly modest we do still see potential for wide range of plausible outcomes from the pandemic.
So as the experience unfolds, we'll continue to reassess as we did in Q1.
However, most of our assumption messages falling cdthree on and we do expect that to be the key suffer review this year, but we'll have to monitor and see at this point you will be reflected everything.
But we haven't hedged as noted.
Okay and so.
So thats just so.
I think we're talking about the same thing, but we are talking about a sectorial provision against potential credit problems right. Yeah, I think I think Darko, Kevin was answering the broader question of all the assumptions the credit works the same way way, we're reflecting what we saw during the quarter, we reflected inside of our reserves are inside of our impairments.
And it was you're right. It was a relatively small impact but co bid was two weeks in the quarter right a lot of a lot of the impacts will likely come I think you were alluding to this in the next several the next several quarters, depending on the path of the disease and the economy and the ability of government packages to too.
To spur the economy, and second waves and there's a whole bunch of things that will but we'll be factored into the thinking but what we're trying to reflect is what we actually saw happen.
And that's what was reflected at the end of Q1.
Okay. Okay.
And just real quick follow up back Kevin you mentioned that there were very few downgrades again April.
Sometimes rating agencies are little slow and I look at your presentation.
You have a big chunk of oil and gas sitting a triple b.
In Asia hotels, I'd imagine there's a good chance that there's a lot of this stuff that's sitting in triple B that will fall.
Lower can you give me maybe an example, using some sort of average duration concept here like what happens if a 100 million.
Box of.
These exposures drops from triple B, two to below or non investment grade status. What is the impact on earnings capital can you give us like a general range.
So again I think your questions Morford, Kevin on that and then then for Randy So I'll pass that to Kevin.
Darko, it's kind of Morrissey again, so that's a really difficult question to answer and really because it has to do with the actuarial assumptions working for US right. So as you mentioned when the ratings changes we look at.
Reassess our expectations around future losses, and that really has to do with not just the size of the exposure as you mentioned, but also the asset class the change in ratings, So where did you start where do you land and the duration of the security so.
It's a combination of all those doctors so it's not that kind of thing formulaic things that I could give you a simple answer to it.
Okay, alright, thanks very much.
Your next question comes from the line of Tom I Cant ended with BMO capital.
Yes, thanks, very much good morning, I want to talk about E signature capability I think you'd mentioned that there were some regulatory issues you've got them onboard I'm wondering.
Where do you have them, where did you just get them onboard and how do they vary between individual and group and maybe just a little bit of color as to how they vary by geography as well. Thanks.
Tom It's dean Thanks for the question.
Why don't we Ah why don't we start with Leo and then we'll go to shock and Dan We can take you through.
The geographies in both retail and group so Leo.
Hi, Tom it's legal here, so I can talk a little bit about Asia, and I would actually broadened the topic of bid for Asia.
For us, it's not just about E signature capabilities.
But it's also about whether the regulators have allowed us.
To conduct non face to face sale.
So you've got markets, what do you can do a knee signature, but you need the advisor to witness.
The signature face to face.
So it's a little bit more complicated than just having you signature so with that said.
Basically if I kind of go through different market.
In Hong Kong, we've got a signature and currently what the regulators have allowed us to do is to conduct.
Non face to face transactions using these capabilities for a subset of products.
So you can use it for our protection products, you, well, but not yet for investment linked products like the you well. So there's still some constraints in the context of Hong Kong, but they've significantly loosened the parameters so far.
You go over to the Philippines.
We currently can do digital signature.
And the regulators are allowing non fixed fee.
But only on a temporary basis.
So right now they've authorized.
The board authorized insurers.
To do this until June 30, Us I believe.
For the extension of.
Hence community quarantine whichever comes lot now, they're likely to extend that as we learn from the situation, but that's the kind of a moving target.
Then you've got Malaysia, where E signature as our authorized.
But you need that you need to physical copy of the document.
And right now the regulators that since the requirement for for a temporary period of time and it's not clear whether they are going to make that permanent or not.
And then probably the most restricted right now is Indonesia.
On where on.
Signature is.
Is allowed but you need the process to be face to face.
Sure.
Bundling products, which are a big chunk of the market you can do not face to face transactions for a four protect fuel protection types of products, but its smaller chunk of of the volume of sales of the industry.
And then if I look at Vietnam, you can do both non face to face and any signature of both our authorized by regulators there.
Then you've got China, and India, where we're also the electronic capabilities are.
Our more available the regulators that basically authorized to those processes. So it really depends geography to geography in terms of our own capabilities basically we're currently geared up to.
We'll take advantage of what the regulators as.
Allowed across the different market and what we're currently working on it.
Basically moving out.
Line experience and you advisor experience across each of these market.
To make.
For example that automatic building of data easier.
From stages of the process move more smoothly from one it's to the other ancillary.
Over the shock.
Tom Mcclintock here in Canada.
No in Canada, we've been long strong digital journey for a while now.
And what this crisis has.
Led to in my view is a much stronger focus.
On digital tools and capabilities on the part of advisors.
Clients are worried they want to engage in they want to talk to their advisors. This this is certainly a time where.
The value of advice value, having trust as person.
We will help you navigate this very strong so we're using zuma loss to the point that Neil was making on non face to face.
Essentially our advisors today can sit down.
Over resume with their clients and essentially go from.
What I would call eight times have so identification of me doing financial plan, although we to completion and fulfilling the products. So so it's very much.
It's very much in that.
Vein and we're making very good use of IP and Thats one of the reason.
Why we've continued to see relatively good sales.
Through April.
And it's worth adding that capability has been in place for the past couple of years and so we've we've had a chance to road tested and integrate it with sales tool the signature and so on so at some.
That's allowed Canada to to move quickly.
Dan with a group contracts already interrupted the group groups are on track than ever and the individual contracts and I'll be fine.
Signature.
Yeah. Good. So good question on group I mean, we're certainly I think xchanging what clients electronically.
Pieces of paper and then scanning infilling signatures.
The.
I don't think the contracts are the same Tom but we can you talk to you on that okay.
And is there anything in the U.S. is that as what about the employee benefit contracts can they be albeit on a signature.
Yes, Tom This is Dan we actually had a signature is already in place for a number of things and we expanded prudent expanded it pretty dramatically.
Since we've gone to work from home.
Use as a third party vendor that as very good capabilities for this so that we can now access.
Except the E signature for virtually anything including contracts claims submissions.
Really virtually anything at this point.
And as Leo in shock said, we've also taken this as an opportunity to significantly expand other digital capabilities.
In late March we introduced a new set of.
Digital online capabilities through our Sunworks claim system. That's for disability. We also have just introduced a full mobile platform for Maxwell Max already had a mobile.
Site, but you could not do full enrollment soup to nuts now you can.
And we're gonna be leveraging the Maxwell platform quite a bit for enrollment in fact, we're getting a lot of interest in that and we've also found as Joc mentioned to resume that we can really do virtually anything that we were doing face to face we've been doing finalist sales presentations, we've been doing enrollment meetings, we've been doing.
In meetings with brokers et cetera.
So I think we're well equipped to continue the business forward with all of these tools.
Okay. Thanks for the color.
Okay.
Your next question comes on the line as Mario Mendonca with TD Securities.
Hi, good afternoon.
Kevin maybe just real quickly here on the provision.
Are you have the credit provision associated with asset impairment the $2.7 billion. That's on a base of I think fixed income securities our fixed income investments.
Call it $134 billion so.
First of all eyes are those the right numbers to be looking at those are the comparable things. The 2.7 is on the 134 billion of bonds and mortgages and loans.
We were I think your questions again for Kevin Morrissey, So I'll pass it the Kevin Marci.
Mario Yes, that's right that is the right thanks for that number.
And can you help me just things that through between best estimate NP fab, because I think of the piece that is something you're going to have to leave there and best estimates that can be released as you did this quarter you give me the breakdown between those two.
Sure I'll provide you a bit more detail on that so maybe just first of all some context on the 2.7 that includes the power and non part of business and listen to bolt in the split of that.
You're right that Theres, a best estimate piece and the piece, adding the best estimate about 60% of that total and that the piece has about 40.
What I would maybe advisor different from what you said in both the P. side and the best estimate that unwind your release from the reserves quarterly so that happens naturally the best estimate portion.
Goes against.
Actual experience and that's reported in the credit line of our source of earnings and unwinding. The piece add portion of that Rick is also on a quarterly basis and that happens through the expected profit line in the source of earnings.
So that's a that's showed meaningful number the 60, 60% or even if you look at a total of like if you look at and totaled about 2% of the of the exposure what is that really imply about annualized loss rates that on a best Cessna basis.
Well when you think about if you look at the disclosure that we provided in terms of their credit release for the quarter you could see that that was 25 million. The best estimate portion. So that's kind of after tax number for the quarter. So if you annualize that and convert it to pre tax it's about 135 million.
The year.
And that would be the annual alive.
Expected best estimate credit losses in that fixed income portfolio.
He just that's right.
Yes, so that that's right you only piece I'd add to that Mario was that for the non parliament. So that was related to their shareholder income. So that 135 is the non part yes, I can give the merits of it yeah. It's Kevin strain I might I might just pointed to that what you see is.
We experienced coming through in any given quarter when it's different from that 25, and if you remember Q1 of last year, we had that PGT experience right and that came through in the it. So the experienced comes through in the quarter when it's in excess of the of the 25 million.
Release, and that's you also see that this quarter, what the downgrades of 39 and the impairment of one.
I'm trying to guess what the fact that.
Yes, you can and you can trend that over a long period of time and you would've seen that we typically trended positive to that 25 million, which is probably what you would expect right because credit is that when it did you have been caddick, but it also relates to what will go up in a in times of trouble and will be less when things are sort of more normal.
Right.
I think you'll start to think about yeah. You also need to think about our splits between how the private fixed income works versus the public fund and there's a lot of elements in the privates where.
We potentially of collateral and.
Workout arrangements with the with the.
But the debt hurt with with the Daddy and those types of things right. So so it is a it is more complicated than just the big number you have to look at the pieces and that's part of the reason we tried to give the sectoral information.
Okay. So now I get it I think I've a good understanding what's expected on the fixed income side. The equities are all will all also very large and you can kind of back into the effect. It was about an 18% decline in the fair value. Your equity portfolios are there any triggers that you would use that would necessarily require no impairment on the equity like let's say.
Down 25% for an X amount of time next quarters is there any sort of formulaic trigger that ness necessitate an impairment on the equity.
I'm going to let Kevin jump in and answer it in more detail, but we've given you the sensitivity on the equities and then inside of our.
Reserves were assuming an 8% return on the equities are you getting at the return question are you getting at sort of a impairment trigger now, saying impairments that equities are down a bunch and I would've expected. Some impairments on your equity is given how much equities were down in the quarter.
Well I'll, let Kevin answer I'll, let Kevin to answer that but the the downturn in the equities fully reflected right.
I'll now not if it's offset by the liability like what I'm, saying is if the equities are down but the liabilities also down then there is no effect on your earnings.
Yes, so Mario its Kevin Morrissey, so the impact on the equity Doug does come through.
So we do see that full amount coming through and reflected in earnings in the quarter. When you mentioned a trigger points I'd say that theres kind of two pieces, there's the accounting side and in the actuarial reserve Simon you accounting side, there are triggers around reflecting impairments on surplus assets in a hold that or how they are fast.
No.
So you can have those triggered on the actual reserving side.
I mentioned earlier, we look at that is really a long term has through the cycle assumption and so we would expect to see.
All tilting gains and losses, and we wouldn't normally kind of reset that long term expectation. We must there was a fundamental change in our forward looking assumptions, okay I'll follow up thank you.
Okay and I just wanted to point out that we're closing in on 11 30, So we're going to make the so the last question on the call, but we will be available after the call. If people are further questions.
Your next question comes from the line.
Got talent with Canaccord Genuity.
Thanks for fitting me in I'll I'll, just keep it to one question I might just going back to MFS and if I look at the gross sales quarterly trajectory over the last several quarters, it's increased nicely and in Q1 and you hit almost 50 billion I think was up 65% year over year in constant currency what was the main driver.
Over of that was or like a big mandate over there are certain products that that that help facilitate that that big year over year again.
Hi, Good morning, Scott Thanks for the question.
We've seen as I said earlier, one of the things that we're seeing particularly in the retail channel.
Is the firms that we do business will continue to pare down their provider listen so firms going to fewer funds for your providers and what we've seen is were a net beneficiary almost every time that we see that happen.
And so fewer calendar year last year than we did something like if you look at us products billion dollars of sales and 60 different products gross sales. So the diversity of our sales has just been incredible and so we're seeing.
Flows in the U.S. and us equity categories across the capital spectrum, we're seeing it non us equity categories were seeing in fixed income categories and that is suggestive of firms that are putting multiple products on their shelf and so we've benefited over the last year and a half we see an accelerating in this environment.
To the concentration of the business if you are managers and we.
We continue to see that our business.
Okay. That's helpful. My Thanks a lot.
Okay, I guess that end our call. It is just close to 11 30, so I would like to thank all of our participants today and if there are any additional questions as Kevin said, we will be available. After the call should you wish to listen to the rebroadcast it will be available on our website. Later. This afternoon. Thank you and have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
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