Q3 2020 Sun Life Financial Inc Earnings Call
[music].
Good morning, Ladies and gentlemen, my name is Stephanie and I will be your conference operator today.
At this time I would like to welcome everyone to the Sun Life Financial Q3, 2020 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the speakers remarks, there will be a question and answer session.
The host of the call will be Leach Palmer Senior Vice President head of Investor Relations and capital Management. Please go ahead Ms. commerce.
Thank you Stephanie and good morning, everyone welcome to Sun Life Financial earnings Conference call for the third quarter of 2020.
Our earnings release and slides for today's call are available on the Investor Relations section of our website at Sun like Dotcom.
We will begin today's presentation with an overview of our third quarter results by Dean Connor, President and Chief Executive Officer, I sound like financial.
Following gains or Mark 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 the use of forward looking statements and non IFRS financial measures, which form part of today's remarks as noted in the slides forward looking statements may be rendered inaccurate by subsequent events.
And with that I'll, now turn things over to Dean.
Thanks, Lee and good morning, everyone.
As the World continues to navigate through the challenges of this pandemic I wanted to express my deepest gratitude to our employees and advisors, who are there for each other and are there for our clients. So.
So far this year, we have delivered more than $140 million in claims paid to the families of clients, who have succumbed to COVID-19 and paid millions more in pandemic related health claims.
We've delivered strong relative investment performance for clients and our clients client experience survey scores have increased again for the fourth consecutive year in part due to our outreach in response on cold with 19, it's.
It's times like these that remind us why we are in business and underscore the importance of what we do for clients.
Turning to slide four Q3 was a strong quarter reported net income was 750 million up 10% over the prior year, primarily from more favorable market related impacts, partially offset by reserve strengthening from assumption changes and management actions underlie.
Underlying net income of 842 million grew 4% over the third quarter of last year and underlying earnings per share grew 5% over the same period assets under management grew 12% to just under 1.2 trillion dollars.
We generated a strong underlying return on equity of 15.1% for the quarter. So.
The light cat ratio at SLF is 144% a level well in excess of the supervisory minimum our capital and cash positions remain healthy and along with a low leverage ratio of 21.5% provide flexibility and opportunities for capital deployment.
On October 20, Onest, we announced our intention to acquire a majority stake in Crescent capital Group, a global alternative credit investment manager, primarily focused on below investment grade credit.
Hello, This illustration Seo and fulfillment processes digitally resulting in a great experience for clients.
We also delivered another strong quarter in wealth and asset management growing sales, 28% over the prior year and that includes two major wins in our group retirement services in Canada, underscoring our position as the leading provider in this space and defined benefits solutions are pension risk transfer business.
We completed a $1.1 billion payout annuity sale, which was the largest single day annuity transaction by an insurer in Canada we've.
We also are assumed responsibility for the administration of one of the country's largest defined contribution plans Mcgill University with $1.7 billion of assets.
Sunlight global investments are Canadian wealth management firm delivered 20% growth in retail net flows over the prior year a few weeks ago, we celebrated SL Gis 10th anniversary with the business. We started shortly after the global financial crisis to help Canadians build lifetime financial security and at the end of.
Q3, <unk> had grown to nearly $31 billion in assets under management and it represents a growing source of earnings for sunlight, Canada.
The value of new business, which covers our insurance and wealth businesses, excluding asset management was up 4% driven mainly by higher sales volumes aided by Canadian group retirement services.
Help our people on this front and as a financial institution, we need to do our very best to help our clients.
And with that I will now turn the call over to Kevin strain, who will take us through the results.
Thanks, Dean and good morning, everyone turn to slide six sunlight continued to perform well during COVID-19, which was a testament to our strategy to derisk the business and to invest in technology, coupled with our track record of strong execution with strong financial results for the quarter, including for earnings row.
Offline growth and capital Ah reported EPS for Q3 was $1.28 of 11% over last year and a reported net income for Q3 was $750 million reported earnings were driven by strong underlying net income and favorable market related impacts.
Partially offset by unfavorable assumption changes in management actions.
Margaret related impacts were predominantly driven by interest rates and equity market growth.
RC offset by the narrowing of credit spreads and changes in the fair value of investment properties, mostly from office and retail property valuations.
Underlying eps's $1 44 increased 5% over a strong Q3, and 2019 and underlying net income in the third quarter was $842 million driven by strong results across all four business groups.
Growth is expected profit and new business gains positive claims experience and positive investment experience, where partially offset by lower earnings on surplus income and corporate results as the prior year results also benefited by.
Right us with good financial flexibility on October the first we issued $750 million of subordinated debt, which brings our pro forma leverage ratio to 23.5% and pro forma cash at the holding company to $3.2 billion booked.
Book value per share increased by 7% over the prior year to $38.17, reflecting reported net income foreign currency translation in accumulated other comprehensive income and net unrealized FX gain partially offset by dividends on common shares.
Slide seven shows business group performance on both a reported and underlying net income basis for the quarter. Canada's reported net income of $387 million increased 74% compared to the third quarter of 2019, driven by underlying net income market related impacts and favorable accurate in the quarter underlying.
Net income was $293 million, an increase of 9% from improvements in group benefits and strong expected profit growth.
The favorable results in group benefits were driven by lower disability claim volumes as well as pricing actions, we have taken to address increases in long term disability claims.
The us had a net loss for the quarter for reported net income of $113 million, which was an improvement over the same period last year, reflecting less unfavorable assumption changes and improved market related impacts.
Underlying net income in the US was in line with the prior year as favorable morbidity experience in stop loss business growth and higher investing activity were offset by unfavorable mortality in the group benefits business and unfavorable expense experience and less favorable credit experience reported net income in our asset management business increased by 14 per.
He said to $251 million, reflecting lower acquisition and integration costs offset by unfavorable fair value adjustments on MFS share based payment awards, reflecting MFS has growth in AUM.
Underlying net income increased by 17% to $294 million driven by higher average net assets at MFS and higher income at ESL fee management, partially offset by changes in returns on seed investments as MSR MFS had seen gains seed gains in the prior year, which did not repeat this year and thats what.
C has ceded losses in the third quarter related to certain real estate investments in Asia, we saw our highest underlying net income ever in the third quarter reported net income increased by $66 million to $236 million compared to the same period in 2019, mostly driven by favorable ackman.
Underlying net income increased to $164 million on lower new business strain, primarily in international hubs favorable expense experience in business growth, partially offset by less favorable credit experience.
Our corporate segment, which includes the UK business reported a net loss of $11 million for the quarter down from reported net income of $253 million in Q3 2019.
2019 reported net income benefited from favorable accurately in the UK.
On an underlying basis, the corporate segment had a net loss of $45 million in the quarter compared to underlying net income of $70 million in the same period in 2019.
The prior year included the favorable impact from the resolution of tax matters, which was not repeated this year.
Other drivers of the year over year change included favorable credit experience in the UK, partially offset by improved expense experience in corporate support side.
Slide eight provides an overview of the source of earnings against a challenging environment expected profit grew by 13% year over year with 13% growth in Canada, 15% in the us and 17% in asset management, excluding asset management and the impact of currency expected profit grew by 8%.
In Asia expected profit grew by 4% as growth in the business of 10% was partially offset by higher plan regional office expenses.
We had new business gains of $8 million during the quarter compared to strain of $22 million in the prior period.
These gains were driven by repricing actions in Canada, and higher sales and repricing in our international hubs business in Asia.
Experience losses in the quarter were $13 million, largely driven by unfavorable net market related impacts from the impact of narrowing credit spreads and lower appraisals of investment properties with partial offsets from higher equity markets and interest rates are.
Other experience items in the quarter included favorable morbidity experience and investing activity gains partially offset by unfavorable mortality experience in us group benefits predominantly from COVID-19 related claims and unfavorable expense and other experience during.
During the quarter, we undertook our annual review of assumption changes and management actions or ACLA, which amounted to a pre tax loss of $91 million or $53 million After tax Act.
Excellent in Q3 included negative updates to mortality assumptions and lapse and other policyholder behavior reserves strengthening predominantly in the us and in in force management.
This was partially offset by favorable morbidity updates in Canada, and the UK as well as favorable investment related assumption updates and other model enhancements.
Other in our source of earnings which amounted to a loss of $60 million includes the fair value adjustment of MFS share based payment awards acquisition and integration costs and the impact of hedges in SLF, Canada that do not qualify for hedge accounting.
Earnings on surplus declined year over year due to lower investment income and lower FX gains.
With the addition of new investment capabilities SLC, we expect there will be opportunities to enhance yields over time in surplus.
Effective tax rate on reported net income was 10.3%, reflecting tax exempt investment income on an underlying basis net income on an underlying net income basis. The effective tax rate was 17.5% inline with our expected range of 15% to 20%.
Slide nine sales the sales results by business group, which continued to show resilience despite restrictions related cobot 19th.
The quarter saw continued push towards digital sales, which dean discussed earlier and the reopening in some markets of more traditional face to face sales for example, in Hong Kong, China, Vietnam and Malaysia.
Total company insurance sales were broadly in line with the third quarter of 2019, Canada insurance sales decreased by 28% as a result of lower sales in group benefits from lower cases coming to market on a constant currency basis us insurance sales increased by 24% driven by higher sales in all lines of business as our.
These solutions are gaining traction with employers.
Asia insurance sales were in line on a constant currency basis with the largest increases being an international hubs offset by decreases in the Philippines compared to the prior year.
While the Philippines remained and lockdown for much of the quarter sales more than doubled compared to Q2 as advisors pivoted to digital tools.
Total company wealth sales increased by $11.5 billion or 28%.
While sales in Canada increased by 65% driven by higher large case sales in both defined benefit and defined contribution plans.
Asia wealth sales increased by 7% on a constant currency basis, driven by fixed income sales and India, partially offset by lower wealth sales in the Philippines.
Gross sales in our asset management businesses increased by 24% on a constant currency basis, largely from higher mutual and managed funds sales in MFS, partially offset by lower sales and SLC management.
First saw positive flows of US dollar $4.5 billion this quarter driven by the seventh consecutive quarter of positive retail flows institutional flows were negative in the quarter driven by client rebalancing.
Five new business in the quarter was $261 million, an increase of 4% compared to the same period in 2019.
Mainly driven by volumes in particular from the Canada group retirement sales.
Turning to slide 10 year to date expenses were up 3% on a constant currency basis, while controllable expenses increased by a modest 1% as we continue to drive expense discipline across our businesses.
We also benefited from lower discretionary spend like travel and conference related costs due to COVID-19, while continuing to make investments in digital initiatives across the company.
As Dean mentioned on October 20, Onest, we announced our intention to acquire a majority stake in Crescent capital group, which we expect to close by the end of the year with the addition of Crescent SLC management now has a full suite of alternative investment offerings for our client across fixed income real estate infrastructure equity and alternative credit to that.
And we're pleased to announce that we'll be holding a virtual ESL fee management Investor day on March 18th 2021.
Where Steve Peacher, and his leadership team will walk through our investment capabilities our strategy in the alternative space and our aspirations for this business.
In summary, we had a strong quarter with solid results across each of our businesses. We continue to focus on making investments in our businesses to strengthen digital capabilities, helping us connect with clients and advisors globally.
Also focus on our M&A pipeline, all the while maintaining a strong capital position with that I'll turn the call back to Lee for the Q and a portion of the call.
Thank you Kevin can help ensure that all participants have been operating.
Ask questions on today's call, we'll give you to please limit yourself to one or two questions and then re queue with any additional questions and with that ill now ask Stephanie to pre pull the participants for questions.
Thank you as a reminder, in order to ask an audio question. Please press star followed by the number one on your telephone keypad. Once again that is star one to ask a question.
And our first question comes the line of Scott Chan of Canaccord Genuity.
Good morning.
My question is on MFS right.
Really strong quarter nice pre tax operating margin of 40%.
Looking out into 2021 outside of market factors, perhaps just an update on industry fee trends and if that is impacting msas and also on expenses, which seems to be well controlled in the quarter.
Just an update there in terms of what.
Are you are seeing for next year.
Hi, Good morning, Scott My prepared.
And.
Yes, so given that we've guided over really over the last number of years around margin and normal environments in the mid to high Thirtys. This quarter was a little higher than that.
Some of that due to some cost control that we took earlier in the year given with the market did early.
But also things like travel entertainment are down given poet. So some of that's probably not sustainable through the cycle. So we continue to think that mid thirtys to high Thirtys range for the margin is whats probably sustainable in terms of fees. When you look at industry fees. They continue to come down 1% plus per annum. If you look across the industry.
We would expect the industry to continue to see that year on year really for for some period of time.
We've been fortunate that we've run for erosion less than that and some of that is mix. Our institutional businesses has been in outflows, while our retail business has been solidly in inflows and so we've been outperforming the industry from a fee perspective, but we would stay with the guidance of anywhere from mid to high thirtys through cycle.
Okay. Thank you very much.
Your next question is from the line of Gabriel Dechaine with National Bank financial.
Good morning, I just want to add.
You are about the real estate.
Revaluation losses was six quarters in a row.
We've seen those just wondering if.
You can tell me, what the and what impact that has on on your reserve assumptions their charters that might ensue.
And you know.
Maybe some sensitivity what if you were to reduce your real estate return assumption by 100 basis points or something about a big big number or not.
Thanks, Dave I'll turn the question that Kevin Morrissey on the actual best estimate than the real estate assumption and then maybe as Randy wants to add any detail on the performance of the real estate class you can do that.
Yes, thanks for the question Gabriel its Kevin Morrison. So yes, we have had a recent.
That has been unfavorable state returns longer term experience has been quite positive and then remember for the valuation assumptions. This is this is a very long term assumption.
So far this year, we've certainly seen some impacts in the pandemic that are being observed synergistic portfolio. We're monitoring it longer term I think it's it's a little too early to conclude for the longer term assumption, Gabriel where where that's going to go.
Well, we still continue to view real estate very favorably from a relative value perspective, especially in this low interest rate.
Environment, So in terms of the size.
We have disclosed to the world.
Relative sensitivity of all of our assumptions for real estate.
I don't want to speculate on the sizable potential change as I said, you know our long term experiences and continue to be favorable and we continue to have confidence in our current assumption.
Okay.
And.
Yep.
Yes, Randy Brown I'll comment on on real.
Real estate valuation for the quarter.
The the valuations in their portfolio.
We're actually.
Okay. They came out slightly positive actual.
Total rate of return, but as Kevin said, they did underperform longer term assumptions that portfolio is highly diversified we're very comfortable with it.
And.
As Kevin mentioned, we are actually quite favorable on real estate as an asset class in the very low rate environment. We think the real rate of return available in real estate and other real assets.
In this environment will be quite attractive both for us and for others.
All right. Thanks, My next questions on the group business and a another quarter here where claims experience has been positive.
I'm wondering to what extent are the recent results have benefited from the government support programs and the.
If maybe.
Maybe maybe looked at a different way that this type of friend the positive for claims trends were that compel you to bake in that the performance into your expected profit next year, but that gives a I guess a comment on sustainability.
David Steen I'll ask shock and then Dan to comment on the first part of your question and then.
And then Kevin Morrissey to comment on the second part on expected profit.
Thanks.
Thanks Dana.
Thank you for the question.
As you say there is indeed, a lot of uncertainty out there what we saw.
With claims is a gradual ramp up through the quarter I.
I would say as we were ending the quarter and the level of activity.
It was pretty well back to.
All levels.
The fact that a gradual increase during the quarter of course has benefited for us.
I would say looking at habits, it's tough to predict Gabriele the second wave of.
The stronger than we thank god that could impact that.
I would also point out that.
This lower claims is yes.
This favorable when we look at experience at the same time.
Note that we have administrative services only business Maria so as we call it.
One of the things that means is actually generates lower fees for us because.
The fees are off the volume of claims so it's a bit of a mix picture. There remains a fair bit of now in terms of where we're going but that's obviously something we're watching closely Galleria.
I'll turn it to them.
Thanks shock for the morbidity in the U.S. group business are there's a few different factors at play here.
The primary driver of favorable disability favorable morbidity experience for us in the quarter was in our stop loss business and a fair amount of that was actually the emergence of experience from prior periods. So we can't really relate that to economic factors for for Covanta.
At this point.
Our disability experience was generally in line with expectations.
So there is certainly may be some impact so far of the very strong support that have been provided to businesses in the U.S.
But as Joc said, it's a little difficult to.
To predict how that will emerge going forward.
Kevin.
Given us some marci could you just clarify your question on the expected profit impact as well.
Well I I guess it.
The arc and Dan's questions sort of answer to like whenever you see positive experience over an extended period and group and especially in the following year, you kind of bake that into your expected process.
Don't occur reflect some stuff that you view as.
More sustainable.
But maybe maybe not and sounds good.
Yes, I think that's right that's.
Right way to think about it gave me on that the expected profit does align with the pricing assumption so to the extent that we do make updates when changes as part of the pools those assumptions that would be reflected in the expected profitability next year.
But it really does aligned with pricing pricing changes.
Okay. Thank you.
Your next question is from the line of Meny Grauman with Scotia Bank.
Hi, good morning.
Showing up on the comments you talked about the risk of a second wave that's in front of US I'm wondering if there is any actions you could take on sort of proactively to take risk off the table given that uncertainty and I'm thinking about.
Building reserves in particular, and we heard from one of your peers yesterday about a sort of a little bit more caution outlook more cautious stance.
As they look forward. So I'm just wondering if that's something that's on the table and why or why not so would you consider that.
Maybe I'll take a I'll take the first shot at that and if a if randy wants to add some things or or others. Ken on the call. You know it's a if we if we look at cover Nineteena whats happening either one of the most important things. We are doing is we as we talked about earlier is our pivot to everything digital and building our digital capability.
And we're seeing really good traction on that.
On the.
On the risk side, you know, we're well aware of the risks on mortality.
Mortality and morbidity and you've seen the the impact they've had on the results and we continue to to look at that and manage that and as that as we think about pricing actions and mix of business and those types of things and on the invested asset side.
It's you are seeing lower and lower yields and as I mentioned earlier one of the things that we can do is with the addition of some really effective asset managers at a low yield environment, we can leverage SLC to drive yield up and we think that.
If you look at SLC the timing for adding these capabilities is perfect given the environment that we're in right now and you heard Randy talk a little bit about that so we continue to run scenarios. We can it continue to stress test, but the capital, but overall the business is performing well and you can see that in the results. So far. This this this year. So I don't think there's any.
Anything special we're doing outside of continuing to be good risk managers thinking about investments and how investments can perform in different scenarios and then building digital capabilities and many it's dean I would just add to kevins comments just to build on that that in some ways. The most important things. We did we did several years ago, which was the de risk.
The asset portfolio, Randy talked about that before that set us up nicely coming into this pandemic. Obviously, we didnt know there's going to be a pandemic, but we were looking and thinking at some point. This credit cycle had to turn for some reason and.
In hindsight I'm glad we took those de risking actions. We did that was the right time to do it.
The only other thing I would its Kevin again, they don't I'd add one more thing. The fact that were geographically diverse beans that covance, having different impacts in different markets at different rates and that also benefits us.
Thank you.
Your next question is from the line of Darko Mihelic with RBC capital markets.
Hi. Thank you. Good morning first question is for Kevin strain you mentioned, a in Asia that expected profit.
It's impacted by some planned expenditures can you maybe highlight how much that was and if.
That is expected to continue next quarter and into next year.
So the the way that we do our excess darcos, Kevin and I will be able to add to this because the way that we do our expected profit for corporate costs like the retail office is we put our planned expenses into the expected profit and the difference between the 10% return in the 4%.
For the VNB, 10% growth versus a 4% relates back to that in fact, those planned expenses because of a lot of different things.
Good management, but.
Kobe, Ed reducing expenses and those types of things actually didnt happen and we saw a small positive but the number is it's less than 10 you.
You know and you see it it comes through the.
The expense results as a positive and a negative this quarter. So I don't I don't see this necessarily recurring next year, we reset the plan for expenses.
The growth in.
VNB in in Asia from the businesses is largely consistent with the growth we would expect to drive a 15%.
Earnings growth from from Asia. In fact, there was a headwind a small headwind in the 10% related to equity markets coming down. So overall I'd say it's a.
That kind of gives you the perspective of where that lies darko.
And I just want to flush out.
Asia, a little more in terms of.
We all know that the Philippines has had a bit of a.
Run with Gogo, you've done some work there on on digital so are we to expect that that should bounce back.
And perhaps have better than 10% EBIT growth for the whole segment into 2021.
I'll turn that to Leo.
Yeah. Good good morning, darker near here. So you know in the Philippines, what we've seen as you can see from the numbers is that sales were in fact down about 25% from last year this quarter.
But if you look at sales this quarter compared to prior we.
Basically doubled sales compared to Q2.
The context that you've mentioned is very severe situation, probably COVID-19 standpoint with.
Maybe one of the worst health crisis in Asia, and also one of the strict.
Movement restriction environment in Asia as well.
And so thats had material impact on sales, especially in a market where.
If you look at our agency model and the culture, it's very much based on relationships and human interaction.
So what you've seen over the course of the last quarter. The bounce back that we've had is very much driven by a lot of actions we've taken because the broader environment is pretty much. The same we've driven a lot of debt.
Digital rollout.
He mentioned a few of them. So for example, we've got digital point of sales capability across the market. We've also rolled out a virtual capabilities on top of digital point of sales. So that means you can basically do things remotely with digital signatures and so on.
We've also.
At raised our medical limit through capabilities like Rome, the remote medical exams that Dean was talking about and then we've also.
Really dialed up our reach out to clients.
With things like Webinars, which you know one of the positive byproduct of this whole thing is is with Webinars were actually reaching an order of magnitude more client in things like like education event.
So there's been there's been a lot of activity to overcome these movement restrictions that's creating some of this momentum and more tangibly Ida at an underlying activity level, what we're seeing is that the.
The activity ratio of our advisors is almost back to pre crisis level, but we are seeing lower policy side.
And in my mind, that's reflecting the economic challenges of the market you've got significant unemployment on you've.
You've got a lot of people across the Philippines, who have lost their jobs or app reduced.
Discretionary spend capabilities and so while we expect to see continued rebound of our activities in the Philippines. We do expect significant headwind from from economic situation and then also just the uncertainty with regard to future waves of COVID-19.
The situation Hasnt really improved and.
Different parts of the Philippines, keep going back and forth between if youre locked down it like that to be locked down we don't anticipate that to get much better over the next couple of quarters. So we're optimistic about our own business momentum, but at the same time not were just realistic about the significant headwinds there in terms of the country.
New economic volatility and coordinating wave.
And just a point of clarification, the Philippines when you make sales there are they predominantly.
New business gains.
Yeah, Yeah, there there's material new business gains with DCF correct. Okay, great. Thank you very much.
Darko just quickly Kevin I think I might have said BMD once by accident in there. So it's 10% expected drop pop expected profit growth from the businesses, 4%. When you include the regional office just to make sure its clear for everybody.
Thank you.
Your next question is from the line of Doug Young with Macquarie capital markets.
Good morning.
Big picture.
And maybe this is for Cabot.
There's a lot of the list of things that moved for you and against you I guess in the quarter and a lot of talk and I'm talking from an underlying earnings perspective, not including ackman.
I'm, just trying to get a sense of.
Was there anything unusual this quarter that really leaned in your favor from.
Investment gains or higher than our normal favorable policyholder behavior expenses things like items that may or may not recur just trying to get a sense of when I look at the quarter or is there anything really abnormal leaning one way or another.
Thanks, Doug when you look at the notable items.
You can see that they were $35 million for the quarter and I think this is a good place to look for those sorts of unusual things.
From a notable items basis, that's that's rate on our eight quarter Rolling average. So I think it's roughly where do you expect to be at higher from morbidity. This quarter, obviously at 65, and we had the mortality hit but on average its Reno right, where we've been the last eight quarters.
And you know we had a tailwind last year from taxes that didn't reoccur. This year. So I think as I look at it there is not.
A lot of noise per se in the results you've got a very sort of clean thing that there wasn't a lot of one time items here the improvement in morbidity as we've talked about is a you know there's obviously some uncertainty whether it will continue to be as strong as it was this quarter, but overall it was a good quarter.
Okay.
Perfect and then just to assist US in force management I know gain I've asked you. This before from other third quarter gone by and there is a fairly sizable hit.
From an act my perspective.
The last three years and you've lost money on this business from a from a net perspective and probably happens again.
This year.
Well and so just trying to get a sense of why.
Why keep the business and I guess, you don't need the capital.
It's a non core business causes a lot of noise just wanted to get another sense of your outlook for this business and plans for the business.
Okay.
Yes, Thanks, Doug.
You know I would say that the work that we continue to do with the enforce management business in United States, which includes you know renewing reinsurance treaties restructuring the triple X. structure as we did this quarter strengthening reserves for lapse et cetera are things that have to get done whether we own the business or other zones.
So our view has been you know we need to optimize this business for all the different dimensions expenses capital cash generation tax the role of reinsurance and of course being there for clients and you know I.
Our focus has been how do we we have to deal with all the issues I just mentioned, but how do we also make it a better business and improve it and so there's been a lot of progress Weve dealt you know weve talked before about some of the work we've done on stranger on life insurance cases, Stoli cases that we've made some great progress there.
Weve made good progress on expenses and so on all the other issues that as you pointed out have been headwinds are headwinds that we would somebody would have to have dealt with one way or the other.
So that's how we're thinking about it and we'll continue to optimize it and in that sense Thats. The way we are thinking about our UK business as well, which is also closed but you know lots of from continue to see opportunity to optimize it.
And are you done like is most of the big heavy lifting data are you halfway through or are we in the fifth and sixth innings.
Trying to get a sense.
Doug we're never done.
We're never done.
[laughter] I would I would just say as we look ahead, we continue to see opportunities to optimize these close block businesses.
Okay. Thank you.
Your next question is from the line of David momentum with Evercore.
Hi, good morning.
I just have a question for Dan on the stop loss business in the U.S. and the competitive environment there.
There Ben a number of new entrants are planned new entrants in the market I think.
Including a Swiss re and Google partnership.
And Zurich has also said they want to enter that business.
I guess you know I know you guys have been at it for a while and people come and go in the market, but what's your view on the competitive nature of the market.
Stop loss business specifically.
Given these new entrants and how does that impact your view of your margin goals.
Surely it's always been a highly competitive business and as you noted our competitors do come and go in including go Weve seen some leave the market.
You know, it's obviously a very attractive business. So it's attracting interest at all times, what I would say about the way we think about it is it's a business that is highly dependent on the skills of.
Oh the people the expertise and that's really what the brokers consultants and employers are looking for is a really excellent partner.
With people, who really understand the business and how and can help them manage through it. So we believe we've got the best team we have the largest team in the industry. We are the largest independent player and we backed that up with the best talent and that will continue to be our differentiation at the same time. It is our intent to continue.
New to expand the business to differentiate beyond core stop loss by helping our employer clients manage claims and care more effectively so look for more from us on that in the future. We already have good clinical capabilities in place, but we hope to to grow that Oh.
Over time, and then just as far as the current environment, its remaining competitive but reasonably rational and as far as the new entrants. You know those are planned entrance, we havent really seen them in the market yet at this point.
Okay, Great. That's that's that's helpful.
And then if I could just shift to Asia and just a question for we show on the international hub sales so.
Yes. Another strong result, this quarter and that contributed to a smaller new business drag and help total Asia sales stay flat I.
I know last quarter, there was some of the existing pipeline coming through.
Converting to sales so I'm I'm just wondering if you could talk about the dynamics this quarter and specifically if you've been able to start replenishing that pipeline. So we don't see a big drop off in sales at some point once once the pipelines exhausted.
Thanks, David Good morning.
So.
With with international sales.
International hub in general.
You'll recall that we.
We we made it a strategic priority for us in Asia in General we see we see strong demand in Asia or high network Ultra high net worth estate planning and tax planning.
Type of solution.
And you know I could result, we've made a number of big investments in this business. We did the restructuring creating international hubs, we have been investing in the technology, we launched a new platform with new client portal and broker portal, we've been innovating the products and so on so we think you know all of that is helping.
The momentum of our business in a in a market that that's quite competitive and you don't argue that's explaining some of the continued success of that business as.
At the same time, obviously, we've got Koby 19, and I mentioned last quarter, we typically have a sales cycle of about six to 12 months in this business.
And so as of Q2 I was describing the strong result sensing that sales.
Those were probably sales that started somewhere in 2019 or early 2020.
That's still the pattern for us and so if you think about our sales in Q3, a lot of these would have started maybe late 2019 or or sometime when this started the cobot way this year and as a result, if you think about our sales this quarter, there's still strong compared to last year.
But they are down compared to Q2.
And that in our mind reflect some of the headwinds related to cope in 19, and the challenges with travel restrictions and quarantine.
And so if you think about sales in this market going forward, we do feel very good about our competitive position beside the other insurance companies given all of the investments we've made and the capabilities. We've built that I described but if you think about the pipeline that the level of brokers.
We do think that that is shrinking and that as.
As we think about the next couple of quarters, you're basically going to see pipeline Thats started after the start of Covidien 18 in Asia in you know in the February March timeframe.
So why so we've got two offsetting aspect that we're expecting strong competitive capabilities on our side, but.
A smaller pipeline with brokers as a result of restricted travel restrictions and quarantine.
Okay, Great. That's helpful and if I could just follow ups. So is this is this business I would think it's kind of hard to do.
On a virtual basis, but is that something that you guys are exploring because I know that low interest rates helps this business just from a premium financing standpoint, which I understand is is a bigger component in some of the high net worth sales, but are you guys are you guys exploring maybe more virtual.
So.
Sales or are there certain regulations that would prevent you from completing a virtual sales.
So what.
You know I think Theres a couple of aspects to this one.
These are heavy planning oriented sales and.
Given the nature of the transaction, they're very advice intensive they tend to be face to face type of interaction.
So thats one aspect of just illicit how the business is transacted that said we are evolving to reflect the current environment and we can conduct some of these.
Transactions remotely and so we have rolled out capabilities, including E signature and Docusign I to enable remote remote sales of this business.
But just given the nature of the transactions, we still find that most clients. Most brokers wants to conduct this business face to face that could evolve if the pressures of travel restrictions just continue.
But it's mostly the nature of it today.
Got it thank you that makes sense.
Your next question is from the line of Paul Holden, Let's see.
Thank you good morning, two questions one I go back to the discussion on experience and Canada group benefits I guess disability.
In particular, so it was positive this quarter, but was a source of negative experience last quarter. So just want to better understand what's creating that volatility.
And what that might mean for future results. If we can make any inferences.
As John will turn that question to you.
Thank you Karen and Paul. Thank you for your question. So indeed, if you look at Q3.
This year versus Q3 last year, we had.
Very good improvement in our experience.
It is driven predominantly by.
Visibility and group benefits so ill.
Take you back perhaps quickly Paul there are three key leavers here that are important in this business number one is what we call him for that but it's really just.
The volume of cases that we get.
The second one is recoveries noise how quickly how many people we get back to.
The work from visibility.
And last is pricing and you heard me talk about that before we recognize early on last year actually that is.
This business needs that repriced rebid to reprice and we did that so if you. If you compare Q3 this year to Q3 last year.
The main driver of units are the largest driver of it is the volume it's the answer them and we.
We were not quite sure Paul frankly, whether it's it's one data point or the start of a new trend that's kind of a tough one to call.
As you know we have had over the last few years.
Growing incidence level and mental health and being referred to that in his remarks.
As being a very important driver. So so we have positive experience for a favorable experience on one hand for them.
We're watching that closely as you can imagine to see whether it continues or not.
But that's really what is the main driver for the delta versus last year.
Got it that's helpful. Thank you.
And continuing with the group business. This question applies to both Canada and U.S.
Q4 tends to be the peak quarter for.
For sales just.
So that's a piece of the business that's been impacted by Cove. It seems like there's less less transaction activity, taking place and across the industry. So would be helpful to get a view on what you're thinking what the pipeline looks like for.
Q4 sales given the historical importance of that quarter for gaining new new business.
All its dean I'll just jump in here and say, we as you know we tend not to give forecast looking forward for for sales numbers I think Dan.
Dan described some pretty good sales momentum in the third quarter you saw that in the numbers.
But I would prefer that we not get into the business of projecting sales forward I'd. It's it's not typically how we've done it so.
Maybe you can talk a little bit about the dynamics going into the quarter again with covidien somewhat disruptive to that to that market.
And do you want to just make some overall comments on how clients are thinking about this because obviously any any actions.
What we saw in the third quarter.
We're instigated any sales activity were driven by client needs first and foremost.
Yeah, I think its our sales organization has really done a great job at adapting to this environment we win a one.
Hundred percent virtual literally overnight.
As you saw our third quarter results were quite strong overall up 24%.
And up 40% in our group business is up also in our stop loss business. So thats been reflective of their ability to react very well to this environment and to do this it conducts the sales process and maybe more importantly, the entire case installation in it.
Enrollment process.
100% virtually and very effectively and that's what clients are looking for right now.
It is true that there are fewer clients.
So far during this pandemic in the marketplace that you know for us.
Proposal activity is down across the industry, but our close ratios have been excellent because clients are coming to us for those digital and virtual capability and our ability to serve their needs.
In this unique way at this time.
So you know again I said as Dean said, we wouldn't give forward looking information.
But we would certainly think that those capabilities will continue to be attractive in this environment.
That's helpful. Thank you.
Your next question is from the line of Nigel Desousa with Meritas investment returns.
Oh. Thank you good morning, I had a two part question on how to think through the impact or the potential impact from a low rate environment.
So the first part is when I look at earnings on surplus that was negatively impacted this quarter from lower investment income. So sudden mainly just quarterly noise that comes from Mark.
Market volatility is that reflective of being in the low.
Yield environment in other words should we think of that as a one off or do you expect going forward that Oh, both along the yield environment will put some pressure on investment income and earnings on surplus.
It's Kevin Nigel debt, you're you're absolutely right, we had a lower earnings and surplus just under $100 million and it did reflect the lower yield the FX gains we had were $26 million and so there is some volatility that comes through in a fast, but we were definitely seeing as weve.
Realign the portfolio. The last few years that we're getting lower investment income. It's one of the reasons I talked about the potential of leveraging SLC, which operates really well in a low yield environment and could potentially add some yield to the surplus but the big chunk of what you saw this quarter was the the lower yield on our current invested assets.
We were lower on a fast compared to Q3 last year, but I think that the biggest pieces that that sort of lower yields we're getting on our invested assets.
Okay. That's helpful. That's a good pivot off of that I think about the the products on annuities business.
So in Canada, you know annuity premiums were strong this quarter, but if we look ahead.
Could you speak to the challenges you're potentially seeing for annuities as as positioning it as an attractive product in a low yield environment and you've already talked a bit on how you're looking to pick up the yield on the asset side is that are those kind of hand in hand, there where you're trying to.
Generate yield on the assets has also kind of support the annuity returns to make them attractive.
Joc why don't you take that.
Yeah. So are you.
Good morning, Nigel on the.
Group side of the business or the retail side of the business.
If it's possible to be calling on both would be helpful. It sure okay.
Well, let me start.
Deem them, Kevin boat highlighted in their opening remarks.
Larger annuity transaction that we have and the 1.1 billion.
In the quarter as you can imagine we're quite pleased with that.
This is a business model that can be lumpy and there's.
She is analogy to it but what I would say, it's a little bit similar to what Dan said on stop loss is you know we are the market leader in that business weve been for a number of years.
We have a very very strong team.
In place we've done some of the most complex innovative transaction so well.
Well that does mean is that you know we tend to pretty.
Pretty well see, albeit perhaps if I can say that an exercise quite a bit of discipline alone.
Oh and be selective on where we want to take a run at anthem huh.
The pipeline I mean, you might think that.
Low interest rates is having an impact there, but what tends to happen line Joe is.
Companies that you.
I knew it ties liabilities.
Turning to slide by being on what I would describe that de risking path for a while and what they'll do is they'll they'll move assets from Wunderlich.
What I would call gross sales matching how sales right. So they tend to.
The immunized because as rates go down yes, the liabilities go up so does the asset portfolio.
And the real driver of what's happening in that market.
It really is a fund that ratio so that ratio assets liabilities.
I'd say that.
That's one dynamic for those employers by the way our plan sponsors that.
They have retained growth assets, while they ended up being hurt earlier in the year when cold in here, but as you know markets.
Recovered so there's still some some good opportunity. So if you look year to date that market. So far is about the same size as it was in 2019 so.
As I said, we were think were well position we've got a great team. We've identified this if you remember from Investor day last year.
Growth engine for US you know this market certainly Nigel if you compare it to U.S. and UK is much less mature there's a lot of runway and we think that companies not.
That are interested in and de risking their pension plans will continue to do so.
On the on the retail side, it's a it's a different dynamic of course its.
You know clients are coming out of this and certainly if you if you think of the.
Accumulation phase and then people going into the accumulation so there's more and more assets you.
Looking for how to accumulate them.
Annuities are another important part of that they usually.
Yes, that's part of a broader set of solutions.
We're continuing to see good numbers there.
It's a business that is quite competitive it's very rate dependent so the ability to win or not.
He is a is very dependent on how competitive are your prices, but it's an important area for us and we continue to focus on.
That because I don't help yeah, that's really helpful color. Thank you.
Your next question is from the line of Tom Mackinnon with BMO capital.
Yeah. Thanks, Good morning, I want to talk a little bit more about it the earnings on the surplus and this leveraging of SLC capabilities. Kevin. This is the lowest we've seen a earnings on surplus probably for like three years this might be the lowest quarter, we've seen for earnings on surplus here. So maybe.
As you leverage SLC capabilities.
How should we be looking at earnings on surplus going forward.
How much of the surplus assets does SLC manage now and how much more are they going to manage going forward with this leveraging you're talking about and if I look at S.L.C., it's largely real estate and private debt and infrastructure does that mean, you'll be bringing.
More real estate into the surplus portfolio and is there any talk about having SLC manage any assets that back liabilities as well.
And I have a follow up after that thanks, okay. Okay. Thanks, Tom well as healthy manages a 100% of the assets in the in the surplus account but.
But as you know, there's there's a mixture of assets there. It's it's more related to some of the new capabilities. What we're bringing in we will see opportunities to do seed investments inside the vessel thing we've talked about that in the past, but theres also abilities to look at other sort of non fixed income pieces that we could put into surplus.
Well, we'll do that over up over a number of years right on it on a fairly steady basis. So you will see it as it as it emerges.
It will create some volatility for surplus earnings because of.
The difference in those those investments as we do it and we'll be kind of mindful of that it as you do as you know this is lower and it Stephanie related to the yields and the ability to do at best gains than it's been in the past I do think that if you were thinking about a range. You know we can we can continue to grow over 100.
Bringing in some of these additional assets over time that will build up that income.
Okay. So it will it will add some volatility yeah.
Yeah. So following on that you said, you're going to leverage their capabilities, but they're already managing 100% of the assets. So when you say leveraged yet leverage the capabilities of the new the new the new businesses, we bought so infrared.
And Crescent for example, but also doing some additional things with BG always biggio expands its capabilities.
Okay is there any talk about having sales are those capabilities.
While these work their way into the assets that back or.
Your liabilities are you going to try to work to bring in some more of those capabilities into those assets.
Well, they do manage some assets already that back liabilities and so you can think about a SLC broadly supporting both the liabilities when it meets the the investment objectives of the and the cash flow needs of the policies, but also supporting surplus.
Okay. So I take it that the real estate. That's on the books is largely SLC managed is that that's that's right. All the biggio would manage all of the real estate and as you kind of crank up that southeast capabilities and earnings on surplus are you trying to crank up their capabilities for the asset.
Asset backed liabilities as well.
We would be using them for well use then the new asset classes when it when its appropriate to support liabilities if it if it matches the needs of the of the.
Other particularly segment and we'll also use in surplus so yeah, Tom we would use it in both liabilities and in the surface segment and in fact, we've got we are already using as you would know real estate backing liabilities as an example.
Okay. So just to close that it sounds like earnings on surplus could get bigger, but the better but there could be more volatility associated with this new initiative.
Yes, that's that's where I would see it and that would happen over time okay.
Okay. Thanks, and then the second question is really.
Maybe for Dean.
Yeah, I think you sort of filled and what you need now with SLC as far as I can and I gather.
With you know with Crescent, and then getting infrared earlier so.
I would say a you know maybe S.L. ceased or you're you're finished with building out SLC. You know what are your next steps now you've got a.
Always generate good excess capital Youve got fairly local that bridge you still have the.
You know you still have ample excess capital what you know what are you looking at what are your case, what kind of capabilities. Do you think you would need to fill where do you see opportunities.
Yes, Thanks, Tom So you're right as Steve Peacher said, when we announced the Crescent acquisition that.
You know, we've we've filled in the key pieces to the puzzle and we've got really now Oh, a really compelling set of offerings to clients in this low for longer lower for longer world within S.L.C. and so we'll pause on on M&A and SLC on.
Sizable M&A, we'll take a pause and.
Do as much as we can to leverage what we've put together and to grow it.
When we look at outside of the asset management pillar and by the way. We I should also say that you're not likely to see us acquire with MFS MFS is at scale already we've got turn.
Terrific capabilities across equities and fixed income across retail and institutional across geographies around the world and in a world that is consolidating asset management firms.
Which as you know tends to put money in motion.
When firms combine we you know one of the things that MFS has been focused on is is trying to be a net beneficiary of that money in motion and in fact, that's that's in part whats been driving some of the growth since 10 sales in MFS, so you're not likely to see us acquire there when we look at Asia. Our story continues to be one.
Looking for opportunities across all of our markets in Asia and across different distribution channels. So we did the bank could deal with TP bank at the start of this year in Vietnam. That's gone extremely well. It's actually ahead running ahead of our plans, they're a very well run bank and Dave you know, it's it's the partners.
Chip is off to a great start so can we find more bank of deals across Asia could we buy larger percentages of the businesses. We're already in the JV partners could we buy other insurance companies.
Our asset management businesses in Asia.
To to kind of.
Yes, the the more normal business versus all the other stuff you're doing.
Okay.
So Mary I'll turn it to Jack and then Dan and I will add just one thing is as I as I do that the if you look at the growth. There is a component that is related to expense reductions as well and that roughly runs probably about half for both of them, but I'll I'll pass over to them to add some more color to that.
Thank you Karen and thanks, Mario and I will try to be quick but it's in line with what Kevin just said so first of all.
We're quite pleased that 13% and if you go back you will see that it's quite a number of quarters now, it's pretty well seven quarters in a row that we're growing expected coffee is quite nicely.
What's happening in Canada, which were quite pleased about is actually happening across all of our businesses.
So, it's not one business or to pulling pulling the rest.
And it's a lot.
Things like I talked about defined benefit solutions SLG I.
Got momentum now and.
And growing earnings nicely and Ela and all the stuff that we're doing in digital but to come back to your specific question its pretty well in line with what Kevin Just said so you can think of it as half of it is coming from this sort of fundamental business growth and half of it is is the real expense discipline that we've been applying for the.
Couple of years and.
We've done that of course at the same time as freeing up.
All there is to continue to invest in our strategic growth areas, but but think of it as about half and half and Mary.
That over to you yeah, Thanks, Joc and.
<unk> group benefits for group benefits in the U.S. I understand what you kind of laid out in terms of you all kind of works real capability and how you're able to close transactions.
Do you see yourself as the kind of in terms of that <unk> offering is somewhat unique in the market place because definitely looking across the board. The U.S. group insurance players have seen kept topline pressure and much weaker sales then what somebody has been able to deliver are you seeing kind of something that is unique to sun life.
Well. Thanks Humphrey you know I think we do I'm, obviously not completely unique but as you pointed out many of our competitors saw significant decreases in sales in the third quarter and we saw a significant increase so I think our digital capabilities are meaningfully differentiated at this point.
And they're out there across a variety of areas you heard Dean mentioned Maxwell that's certainly helping us the enrollment in Maxwell has grown from 12000 employee lives to about 30000 during the year.
We've done 500 virtual enrollment meetings, which is 100% of them in the in recent months.
We've introduced a variety of new capabilities for doing odd enrollment meetings.
Across different platforms.
Including one on one meetings as well as a group meetings and a number of other digital capabilities. So I think the broker community, which represents the employers has come to see us as a good home in this environment a good place.
Our company that can deliver those kinds of services.
So I think we do we have developed some differentiation during this period of time on digital and virtual but lots of opportunity to grow that in the future.
And how does that look in terms of the marketplace given the slowdown in.
Okay.
Yes.
Yes.
Persistency trends kind of over this period.
Yeah, our persistency has improved as I think it has for many because.
Some employers have decided to defer on looking for new benefits partners. During this period of time, so arbors persistency.
He is definitely up a bit.
And then just one follow up question I think in beans, we Mark you talked about from an M&A perspective in kind of.
Group benefits looking potentially maybe adding some.
Complementary capabilities to stop loss like giving your book of business is pretty established.
A major player in the marketplace, what other capabilities would you look to add full stop loss.
Yes, I mean, I can't get overly specific but I, what I would say is we think of stop loss really as part of the overall health insurance Echo system in the U.S. and we are a partner now to employers representing about 5 million employee lives in the U.S.
For their self insured health plans and historically our involvement in those health plans was primarily high claim risk protection, we've been expanding that out into helping them and their employees managed care navigate difficult situations and we do have a program called clinical Threesixty, which.
You already does some really quite effective and helpful things and in that space, but we'd like to expand that more we'd like to step further into the health care space.
Providing care management navigation type services to the members we work with who are facing serious illnesses. Because we think there is a real win win there for everybody. We can help people get better outcomes.
And we can help employers manage their cost profile at the same time, because better outcomes almost always are less expensive.
So as more Jason features as opposed to looking to add more scale correct that.
Thats I would say I think thats the right way to think about it because we have a lot of scale. We're the largest in the largest independent stop loss carrier and our sales are far above anybody else is each year. So we are continuing to build scale organically, what we'd like to.
Do is add capabilities, which will further differentiate us in the market.
That's helpful. Thank you.
At this time, we have no further questions I will turn things back to Mr. Thomas for closing remarks.
Thank you, Stephanie and I would like to thank all of our participants today and if there are any additional questions. We will be available after the call.
Should you wish to listen to the recording of this call. It will be available on our website. Later. This afternoon. Thank you and have a good day.
This concludes today's call. Thank.
Peyton you may now disconnect.
Yeah.
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