Q4 2020 Sun Life Financial Inc Earnings Call
Good morning, Ladies and gentlemen, my name is blue and all of your conference operator today.
At this time I would like to welcome everyone to the Sun life financial Q4, 'twenty and 'twenty financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
Most of the call is Leigh Chalmers Senior Vice President head of Investor Relations and capital Management. Please go ahead and the challenge.
Thank you Lou and good morning, everyone welcome to Sun Life Financial earnings Conference call for the fourth quarter of 'twenty and 'twenty.
Our earnings release and the slides for today's call are available on the Investor Relations section of our website at Sun life Dotcom.
We will begin today's presentation with an overview of our fourth quarter results by Dean Connor, President and Chief Executive Officer of Sun Life financial.
Following Dean's remarks, Kevin strain executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After the 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 question 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 I of fresh 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.
And with that I will turn things over to Dean.
Thanks, Lee and good morning, everyone.
'twenty and 'twenty presented the new challenge to the world and the form of COVID-19, and shine a bright light on existing challenges, particularly systemic racism and climate change and stuff.
Sun Life. These served as a catalyst to accelerate change.
We had already made digital a key focus the pandemic meant we needed to accelerate our digital program, even faster to serve clients virtually when face to face became impossible.
The horrific murder of George Floyd galvanized action to drive lasting change and eliminate systemic racism.
At Sun Life, we started the series of dialogues and training around racism, we set of goals, you'll have 25% of executive roles staffed by underrepresented, the ethnicities and North America by 'twenty, and 'twenty, five including goals for black indigenous and people of color and to achieve gender parity in these executive roles.
Climate change is one of the defining issues of our time and our annual M. D and E. We have included our first climate change disclosures under the financial stability Board Task force on climate related financial disclosures or T. C. F D.
At the end of March we will publish our 'twenty and 'twenty sustainability report that will provide more detail on our objectives and ways, where our expertise can have the most positive social and environmental impact.
Turning to slide four reported net income of $744 million grew 3% over the prior year, while underlying net income grew by 9% to $862 million.
Underlying earnings per share grew 10% over the same period and we generated a strong underlying return on equity of 15, 4% for the quarter.
Our capital and cash positions remained healthy and along with the low leverage ratio and provide flexibility and opportunity for further capital deployment.
MFS ended the year with U S 610 billion and assets under management, driven by asset appreciation and positive net flows demonstrating the continued strength of Mfs's performance and brand.
They'll see our alternatives asset management business grew third party AUM to 106 billion with strong invest investment performance and positive net flows and we reached $33 billion and the U M at Sun life Global investments and Canada with strong investment performance for clients and positive net flows.
Insurance sales of $1 4 billion and the quarter were up 2% over last year with 11% growth in Asia, and 4% growth and the U S on a constant currency basis and.
And Vietnam, we entered into a 15 year of Bancassurance partnership with Asia commercial joint stock Bank or a C. B, which started last month. This partnership complements the exclusive bank of partnership with T. P Bank and Vietnam that started a year ago January and in its first year nearly doubled our Vietnam.
<unk> compared to 2019.
Throughout the year, we also expanded our agency distribution network across the Asia, where we now have 138000 advisors in the region up 12% over 2019.
Turning to slide five as you know we are on the journey of accelerating everything digital driven by our purpose of helping clients achieve lifetime financial security and living healthier lives. We've made big strides using digital data and analytics to change and improve the client experience and here are just a few examples and Canada.
Our digital coach Ella helped clients save an additional $700 million and wealth deposits in 'twenty and 'twenty up 69% from 2019.
And well also helps clients to close the coverage gap contributing to $1 billion of face value and insurance sales up 83% over 2019.
We made client interactions more frictionless digitally processing, 90% of Canadian retail insurance applications, and 79% of retail wealth transactions, our artificial intelligence and predictive modeling accelerated and improve the individual insurance application process with 71% of policies under.
And without the need for lab tests and increase of 26% over prior year.
And the U S. We've just launched a fully integrated disability and absence management technology platform that simplifies the experience for clients as the legislation continues to evolve absence management is becoming increasingly complicated for employers, particularly those who operate in multiple states.
To date, we of onboard at nearly 10000 employer clients to our new state of the art claim system that will enable us to coordinate absent says as a single event across all benefits.
In the fourth quarter, we launched the digital non face to face sales platform and Malaysia, and we now have virtual sales of experiences and each of our markets across Asia.
And finally this year, we introduced digital enterprise across the company, bringing together the business and I T to help us deliver exceptional digital experiences and client outcomes digital enterprise is a new way of working for us. Its how we will ensure our clients can heavy distinctive digital experience integrated across life health and wealth.
Turning to slide six and I'll touch on some highlights from our full year 'twenty and 'twenty results.
Despite the challenges of the pandemic, we benefited from our chosen and business mix and strong execution and this also came through and the returns we delivered to shareholders with five year total shareholder return of nine 6% compounded annually top quartile among 20 global competitors.
Reported net income for the year of $2 4 billion was down 8% from 2019, mostly as a result of equity market volatility and fair value of real estate investments.
Underlying net income of $3 2 billion grew 5% over 2019, reflecting strong business growth and of 13% increase and expected profit strong investing activity due to market dislocations early and the pandemic and favorable morbidity, which includes the impact of lower benefits usage brought up.
By the pandemic.
On the other hand, we also saw elevated mortality experience in the year, mostly related to clients, who sadly succumbed to COVID-19.
Credit experience and the year was also unfavorable driven mostly by downgrades in the second quarter.
Full year insurance sales decreased by 1%, primarily reflecting lower large case sales and lower market activity and candidates group benefits business, while insurance sales were up for the year and both the U S and Asia, including our international high net worth business, which doubled its sales from the prior year well.
Wealth and asset management sales grew 39% to $221 billion with strength across all of our businesses.
We also reached the milestone of 1.25 trillion dollars of AUM.
M. F. S finished the year with four quarters of net inflows totaling U S. $13 1 billion for the year and continued to deliver strong investment performance for clients with 97%, 95% and 94% of U S. Retail assets ranked in the top half of their Morningstar categories based on 510.
And three year performance respectively.
S. L C management, our alternatives asset manager reached an inflection point with underlying net income of 94 million, reflecting strong contributions from recently acquired businesses, including Bento Green Oak and infrared capital.
We also completed our acquisition of a majority stake and Crescent capital Group on January 15th of this year broadening the solutions, we bring to institutional clients and bringing S. L sees third party AUM to 145 billion on a pro forma basis.
On slide seven you'll see how we were there for our clients in a tough year, we delivered nearly $200 million of claims payments to the families of clients, who succumbed to COVID-19, we extended grace periods for our clients to make premium payments provided credits to employers for the lower benefits usage we.
Sol during the pandemic.
And we enrolled over a half of million Canadians and of new virtual health care service through luminary of health and dialogue.
Our client index score measures how are clients of radar on proactive contact ease of doing business and problem resolution. Our score increased again this year increased by three percentage points over last year with increases across all categories, indicating that our obsession with the client experience.
It's showing up and results for clients.
When I stand back from this.
I'm incredibly proud of all of that we accomplished in 'twenty and 'twenty.
It was of hard year for people for communities for countries around the world yet it was the year that showcase the tremendous the termination of Sun life employees and advisers coming together to stand behind our purpose.
And we're not out of the woods, yet on the pandemic and yeah.
And that there's every reason for optimism as vaccines of ruled out around the world.
Sun life is well positioned for 'twenty and 'twenty, one and beyond with the strength of our people and culture diversified and balanced business model strong capital and our ambition to be one of the best and the world and what we do.
'twenty 'twenty one will also be a year of leadership change for Sun life and December we announced that Kevin strain will succeed me as the president and CEO when I retire in August.
I know that Sun life will remain in great hands under Kevin's leadership, He's a strong leader great knowledge and passion for our business and I'll have more to say about that on the Q2 call in August and now over to you Kevin to take us through the fourth quarter results.
Thank you Dean and I appreciate the kind words, I'm excited and humbled to become the next president and CEO of Sun life. The client is at the center of everything we do and every one of our markets with a focus on helping clients achieve lifetime financial security and live healthier like life and as Dean outlined our focus on the client has never been more evident and more.
And then this past year, we've heard countless stories from how Sun life has been there for our clients during the moments they needed us. The most of this is what inspires me and motivates me and Sun life is all around the world I'm.
And I'm looking forward, the leading Sun life and more importantly, continuing to work with our executive team Board of directors employees advisers and partners to build on Sun life success well into the future.
With that let's turn to our Q4 results slide nine provides an overview of the results, which continued to demonstrate strong execution amid the challenging environment caused by COVID-19, our reported net income for the quarter was $744 million of 3% increase over the same period last year driven by strong underlying net income partially offset by assumption.
And changes in management actions reported net income also included higher fair value adjustments on MFS share based awards.
Reflecting strong performance and the year.
Market related impacts in the quarter were positive 20 million of after tax mostly driven by equity market growth, which was partially offset by the impact of narrowing credit spreads and changes and the fair value of investment properties.
The underlying net income was up 9% at $862 million driven by business growth across all four pillars favorable morbidity experience and Canada group benefits and in the U S stop loss businesses, partially offset by lower investing activity and Canada. As a result of asset repositioning and then the F S impairment and Asia.
Credits experienced in the quarter was with a pause of $18 billion of good result, underlying EPS for the quarter was the dollar 47 up 10% compared to the same period, a year ago, while underlying ROE increased by 40 basis points to 15, 4% above our medium term objective of 12% to 14%.
Assets under management increased to 1.25 trillion dollars.
And an increase of 13% year over year, driven by positive market movements and strong net inflows throughout the year and $16 billion of acquired AUM on the closing of infrared and SLC management.
Book value per share was up 6% compared to Q4, 2019 and slightly lower than Q3 as the result of foreign currency translation and other comprehensive income on a stronger Canadian dollar and the quarter.
Our life capital remained strong with ratios of 147% of the that's a lot and 127% and that's the way the SLR ratio increased by 3% quarter over quarter, largely due to the $750 million subordinated debt offering completed on October the first.
And so as ratio was in line with Q3 at 127% and reflects the capital put into escalate from S. The left to fund the ACB Bancassurance agreement and Vietnam the.
The debt offering increased our financial leverage ratio to 23, 5% below our target ratio of 25%.
We ended the quarter with cash at the holding company of $3 $1 billion. After the close of Crescent acquisition in January and our upcoming debt redemption of $350 million. Later this month pro forma cash at the holding company has $2 $4 billion and our pro forma leverage ratio will be 22, 6% slide 10 shows business group.
Performance on both the reported and underlying net income basis, Canada reported net income was 7% lower versus Q4 2019, driven by a similar reduction and underlying net income, which reflected investing activity losses due to asset repositioning and the quarter and unfavorable expense and mortality experience. This was partially offset.
By improved morbidity experience and group benefits on lower long term disability incidents and the impact of re pricing as well as expected profit growth across all businesses.
And the U S. We saw a year over year decline of 33% and reported net income, reflecting the ackman impact of the new reinsurance agreement and our in force management business on.
On an underlying basis net income increased 8% as our stop loss business continued to see favorable morbidity experience.
We also benefited from higher net investment returns on surplus assets and business growth, which was partially offset by less favorable credit experience and unfavorable expense experience mortality experience and the U S was unfavorable in the fourth quarter, primarily from higher deaths and our group benefits business related to COVID-19.
Our asset management businesses saw an increase in both reported and underlying net income compared to the prior year up 17% and 19% respectively.
Asset management earnings benefited from higher average net assets and MFS as well as an increase of 19 million and SLC.
And I still see management underlying net income to $34 million on strong contribution from B G O and infrared.
<unk> reported net income was broadly in line with Q4 2019, while underlying net income was down 19%, mostly as a result of $20 million F. S impairment relating to an investment and managed by our joint venture and India. This was partially offset by higher new business gains and international hubs and favorable expense experience.
And our corporate segment, which includes the U K business, both reported net income and underlying net income increased year over year the.
The improvement under both basis was driven by higher earnings and our U K and other runoff businesses and lower project spend and corporate support compared to 2019.
Slide 11 provides an overview of our sources of earnings expected profit grew 16% driven by growth across all our businesses and particularly we saw strong growth in Canada and in the asset management, which grew by 16% and 22% respectively. U S expected profit grew 7% driven by growth and the business throughout the year.
Asia expected profit grew at a more modest 5% as growth and the business of 9% was partially offset by higher planned regional office expenses.
New business gains improved by $14 million over the prior year, mostly driven by higher sales and Hong Kong experienced losses of $136 million pre tax in the quarter included market related impacts from narrowing credit spreads and the impact of the fair value of investment properties, partially offset by higher equity markets.
Expense experience was unfavorable in the fourth quarter, reflecting investments in digital and and G. B operations, and Canada sales commissions and incentive compensation and the U S and initiatives spend and corporate unfavorable policyholder behavior included small amounts and various products across the company the fourth quarter experience also any.
The unfavorable mortality, reflecting a small number of large claims in Canada, and COVID-19 related claims and the U S group benefits business, mostly offset by favorable mortality impacts and the U K, which is reported in our corporate segment morbidity was favorable on lower incidents from Canada, and the U S and credit experience.
This was also favorable in the quarter.
The $60 million pre tax of ackman and the quarter was predominantly predominantly in the U S.
The earnings on surplus were flat year over year as lower F. S gains were offset by fair value gains on investment properties and surplus and gains on seed investments.
Slide 12 shows fourth quarter of insurance and sales by business, we continued to benefit from our investment and digital capabilities. As we grew total company insurance sales by 2% year over year. Despite of challenging backdrop insurance sales grew and the U S, Indonesia up 4% and 11% respectively on a constant currency basis.
U S sales were driven by growth and both employee benefits and stop loss, while Asia had sales growth and most across most markets the <unk>.
Philippines continues to recover from the impact of COVID-19 restrictions with of 46% growth and sales compared to Q3, though still lower than the prior year, Canada insurance sales were down 18% from the prior year due to lower group benefit sales as fewer sales of come to market.
Well sales increased 15% compared to Q4, 2019, with 19% growth and asset management from higher sales and both MFS and SLC.
During the quarter MFS had positive net flows of U S $1 $5 billion, while SLC management and had positive net flows of $900 million Asia wealth sales also increased up 61% year over year from fixed income sales and India higher money market sales and the Philippines and growth and the Hong Kong pension business.
Canada wealth sales are down 18% from the prior year, reflecting lower defined benefit solution sales and the quarter, partially offset by higher mutual fund sales and our individual wealth business.
The all of new business was $293 million and Q4, and an improvement over the prior quarter, but down 13% year over year, driven by lower sales volumes, and Canada group benefits and group retirement services businesses mix of business in Asia, and the impact of lower interest rates also impact of the D&B.
Turning to slide 13, our year to date operating expenses increased 4% on a constant currency basis over the prior year, while controllable expenses were up a modest 2% removing the impact of acquisitions, which added a new run rate expenses as well as higher contractual volumes from the sales compensation and commissions full year operating expenses were up only 2%.
<unk> from the prior year on a constant currency basis, we continue to focus on the expense discipline across our businesses, while benefiting from lower discretionary spend such as travel and conferences related costs due to COVID-19, and this has allowed us to accelerate our investment and digital capabilities across the company.
During the quarter, we recorded a restructuring charge of approximately $20 million after tax and corporate related to simplifying our organizational structure and driving efficiencies. We anticipate annual run rate savings from these initiatives to be roughly $25 million pre tax, which we expect to reinvest and the business.
We have also been deploying of strategy for our work force and redefining the role of the Coke of the office and a post COVID-19 environment. Starting this quarter, we began reducing and consolidator of real estate footprint across Canada, and the U S and expect to take a further charge of $40 million to $60 million after tax in Q1 to reflect vacating.
And reconfiguration of existing workplaces, which we anticipate will generate gross annualized savings of roughly $20 million.
Turning to slide 14, we show our 2020 full year progress against our medium term financial objectives as well as the five year review underlying EPS grew 6% and 2020.
On a five year basis underlying EPS has grown at a rate of 8% per annum meeting our growth objective of eight to 10 per cent.
Underlying ROE was 14, 4% and 'twenty and 'twenty and average $13, 5% over the past five years and finally, the dividend ratio for the year has remained just inside of our target range.
Our client strategy has been the center of our focus with all four pillars growing underlying net income in 2020 throughout the year, we deployed capital for organic investments, including investments made in advancing our digital capabilities. We also completed the acquisition of infrared entered into strategic partnerships, including two new bancassurance arrangements and Vietnam.
And shortly after the end of 'twenty and 'twenty, we close the Crescent capital acquisition at SLC management.
As a reminder, we're looking forward the hosting you virtually out of SLC management Investor Day on March 18th.
And closing our focus on the client investments and digital and strong balance sheet have helped us to perform well through the pandemic and we remain confident about our financial position and our operating model two.
'twenty 'twenty, one should see the world emerging from the pandemic conditions and we are starting the year from a position of capital strength and a continuation of our growth agenda with that I'll turn the call back to Lee for the Q&A portion of the call.
Thank you, Kevin and to help ensure that all our participants have an opportunity to ask questions on todays call I would ask each of you to please limit yourselves to one or two questions and then re queue with any additional questions with that I will now ask blue to please poll the participants for questions.
Thank you ladies and gentlemen, if you have a question. Please press the star and then the number of one on your Touchstone telephone.
And for your question Thats been answered part of you wish to remove yourself from the queue. Please press the pound key.
Your first question from comes from the line of Humphrey Lee from Dowling and partners. Your line is now open.
Good morning, and thank you for taking my questions. My first question is from Mike regarding MFS and the margin of 41% of it was clearly very strong and I think last quarter you talked about the.
The margin kind of expectation to be in the mid two of 30 of mid to high 30% range and normal markets.
But based on where we are today and assuming the cooperative market is there any reason why we shouldn't expect margin to stay and kind of.
Current level, and maybe even a little stronger and.
Net asset growth.
Good morning, Humphrey, It's Mike Roberge.
And as we've indicated historically, we think through the cycle of normal conditions and the margins should be and the mid to high thirties and along.
Last year really off the market bottom with the S&P up over 75% pretty good growth and the third quarter of markets that youre going to be at the higher end of that when the markets are are sort of maybe a little bit more extended relative to what we see normally that's true and the other side of it if we get of you'd get a correction of 20% you may see of down.
And below that guidance that we've provided as well. So we continue to be comfortable that through the cycle, we're gonna be and that 30% to 35% if the margins stay strong and we're gonna be at the higher end of that on weaker margins will be at the lower end of that and and beyond that I wouldn't give any more guidance.
Okay. Thank you and then in in U S group benefits can you talk about the the various impacts that you've seen across the product line.
From the from COVID-19, it seems like you are one of the outliers and he and the marketplace in terms of still seeing strong margins kind of through.
For the year at 8% I know there are a lot of still of lot of uncertainty, but can you just talk about some of the the the moving pieces in 'twenty and 'twenty and how you think about that going into 'twenty and 'twenty one.
Sure. Good morning, Humphrey This is Dan fishbein.
Yes, let me talk first about our mortality and morbidity impacts.
We've certainly seen mortality, especially in our group life business. There also has been mortality and our closed block individual life business.
But that business has a different impact on the bottom line because.
Of the older Ages and that group is already very well reserved plus we have reinsurance and a significant portion of that is a part of block, but in our group life business, we have seen mortality both in the fourth quarter and through throughout the year.
From a morbidity perspective, we have not seen significant impacts and the LTV business. We have seen some impacts on short term disability and there certainly is more.
Frequency of short term disability claims caused by Covid.
And as you noted of course stop losses, and important part of our business mix and.
And very strong results in the stop loss.
And help to mitigate some of the negative impacts such as mortality.
The other aspect of this is sales.
Sales have remained strong for us and they were up year over year.
And I agree and strong and all of our businesses and that is somewhat unique in the U S group industry.
Over the past year, and we attribute that to our very strong digital capabilities and our experience working virtually and that has distinguished us somewhat in the market. So we've been able to grow market share during this period of time.
Got it thank you.
Your next question comes from and John Aiken from Barclays. Your line is now open.
Good morning, the success that you've had growing SLC management is obviously quite apparent with the that the growth and earnings contribution, but again on a quarterly basis, it's been a little bit volatile I was wondering if you could give us a little bit of color in terms of how the acquisitions have been performing against expectations.
Typically and for Red and Green Oak. Please.
Hi, John and Steve Peacher and.
And I can answer that.
Yeah, we you know.
Just to comment on this quarter, obviously 34 million of underlying net income of the strong quarter for us that was bolstered a bit by some strong fundraising and mental green oak and the fourth quarter, which led to something called catch up fees, which are common and private equity style of real estate funds. When you have final closings and.
And and that helped us in the in the quarter Youre going to see those from time to time and certain quarters and these are going to be episodic and a bit lumpy, but you're going to you'll potentially see catch up fees as some of our underlying businesses close on <unk>.
And final closings of off on.
And or Youll see performance fees and as those come due so that'll add of everything.
And then we're going to get the benefit of the data won't be every quarter.
I look at the different businesses, obviously infrared closed this pad and the summer of 2020.
The Green Oak deal closed a year before that in the summer of 2019.
We feel like everything is on plan and all of our businesses are growing.
In terms of sale of new commitments, we raised three and $5 billion across the platform and the fourth quarter of new commitments and if you look at where we're winning business.
It's across fixed income private credit real estate infrastructure.
And of course Crescent Didnt close until January but they're off to a bang in the in the and January with the first with the close on their latest direct lending fund as well as price and you see L O. So.
You know its always the competitive market, but we feel like each businesses.
And is performing well.
Thanks, and let Steve I'll requeue.
Okay.
Your next question comes from the line of David Multimedia and from Evercore. Your line is now open.
Hi, Thanks, good morning.
I guess just.
A question for Kevin and and Dean and congrats on the retirement I guess a bit early but for Kevin.
I guess do you see do you foresee any any big changes to the to the strategy.
And also specifically around capital allocation and once you take the range during the summer.
You know I've I've worked with Dean closely on the strategies and T. Since he became the CEO actually I was one of the the team members below the executive team of at that point and time that had worked on the strategy with them and that was the CFO for three and a half years I feel like I've had us a big input on the on the strategy I do see us really emphasizing.
Digital and.
And we rolled out a project called digital enterprise, which was really about how working more agile working more like a digital company, bringing I T and the business closer together, but also on the what side of of doing more and digital and continuing to be aggressive and you.
You can see just the impacts on digital through Covid and how quickly we pivoted. So we'll continue to emphasize that.
The sustainability I think is the big topic for every company now, including the diversity inclusion and Dean started his comments at the start of the.
The call on sustainability, and ESG and I think that's going to be an important topic, obviously my time and Asia.
The big influence on me and in Asia has been a big priority for us in terms of capital deployment and I see that the continuing to happen and so it's I've had the great honor to work really closely with the and on the strategy I feel like I've had the input on the strategy and and that we're going to build on that success and the and the strategy and we put in place.
Great and then just a quick follow up on that and do you see yourself and in Asia do you see you guys entering into new new regions, New countries, there or do you foresee interest being more of a kind of bulking up where you currently have of footprint.
You know, we've I think we've got a great footprint you know the.
We were in the the two biggest economies and the two biggest markets with the China and India, We've got a great business and Hong Kong, We've got a really good footprint and the ASEAN region. We're building out high net worth. So you know my focus would be the same as its been the last few years is building scale. So you saw us do to transact.
<unk> on the bancassurance side, and Vietnam, and I was quite involved and those as Dean and Leo of course, and and Larry Madge Who's the CEO there, but the those types of transactions, where we're building distribution capability, we're building partnerships and where we're building in the market that we think has huge potential I think those are good.
Holes of the types of things that will be our focus.
Okay that makes sense and and then just another question Kevin just on free cash flow generation and sort of an update there I think in the past you've sat and the $800 million range per year.
Earning.
Earnings have clearly grown I think send you since you last gave that update so how are you thinking about cash flow. The these days.
And in terms of cash flow above the dividend that you guys are generating and I guess also just wondering how to think about that.
Going forward is that something you see just growing in line with the Ifr S earnings.
As we as we sort of go forward.
Yeah, we're roughly in that range and it's been as you know the capital drives off of reported income which has been the.
Stressed by the economic conditions. So it's it's a I would say that roughly and that same range. We're also investing in and new businesses and those types of things. So I would have that number and mine as we get closer to Iff's 17, we'll spend some more time on how to think about the business post IR for 17.
Okay, great. Thank you.
Your next question comes from the line was caught Chan from Canaccord Genuity. Your line is now open.
Good morning, Kevin just recently and talked about building out the high net worth and Asia, and maybe just talk about international hubs, which kind of supported insurance sales and the quarter.
<unk> not talked about too much in the past, but just that and maybe broadly just on the progression of that new segment, and and perhaps line and outlook there.
And you see on insurance and wall side over the next few years.
Scott, It's the Dean and I think we'll ask the Leo Rep and to take that question.
Good morning, Scott The New York here I can.
Go through a little bit of where we're at with international hubs.
And as you said.
The strong quarter for that business segment.
The the results are the outcome of our strategy with that business over the last few years we've.
We've obviously been and the international and offshore business for a long time.
But over the last three years, we made and explicit decision to make high net worth in Asia and strategic focus for us.
And.
You know one of the early parts of that strategy was to bring the international business into Asia.
Subsequently, we ended up bringing together the international business with all the Hong Kong business under the international hub banner.
And what that's allowed us to do is.
To really start to operate the two.
<unk>.
And this is much more closely.
Bringing together our broker relationships across the region and so you can imagine a much better alignment of the relationships are much better orchestration and much better service for the brokers. It's also allowed us to leverage our capabilities in terms of product development.
We've made significant investments in digital and technology capabilities, as well, which I have also improved.
Our operations and ease of doing business, the core or brokers.
And just generally positioned us the more strongly with <unk>.
More significant scale for example for <unk>.
From the balance sheet and reinsurance standpoint, and so what youre seeing in terms of the results is really the byproduct of that focus.
In the business that requires a lot of expertise and.
And what are there barriers to entry and so we're benefiting from that right now.
And now in terms of what's happening with the with COVID-19, and there is some uncertainty because.
This is the business.
That has the long lead time it takes six to 12 months to go through and Onboarding process with our clients.
Up until now we have strongly benefited from the pipeline that we started to build a year ago and so we've seen that momentum.
Q4 sales continued to be strong, but I would say there's been.
Some softening of of the pipeline given travel restrictions.
And just a quick follow up you talked about expansion into the Singapore market.
Is there any other expansion opportunities and to other regions and and maybe you can comment on sort of Singapore specifically.
Yeah.
Our presence in Bermuda, and now our Singapore presence and our Hong Kong presence. We believe we've really cover the big International financial centres of Asia. So I think in terms of footprint, we feel like we have all of the geographies that we need.
Specifically in terms of Singapore, we acquired our license of last year and the middle of last year and.
And we've been you know.
<unk> the the launch of the office since and it's been going well and we're establishing and network of distributors and Singapore and and that's the.
The proceeding apace and then we're also preparing for regulatory approval of our first product and Singapore and so all of that Sun scheduled and we expect to start this business.
As soon as we get the required regulatory approvals on our product.
Great. Thank you very much.
Your next question comes from the line of Tom Mackinnon from BMO Capital. Your line is now open.
Yeah, Thanks, very much good morning.
The two questions. The first is with respect to our.
Investment experience gains you mentioned, there were some asset repositioning and the quarter. So I guess that met the.
And they have sourced assets, but you didn't have any kind of significant yield enhancement.
The activity.
And as a result of this asset repositioning and does that what does that imply for a and outlook for our and <unk>.
And that experience gains going forward.
Yeah, Tom It's Kevin and most of that was in Canada and was sort of a reloading of the balance sheet you would've seen that we took advantage of the strong balance sheet early and the COVID-19 and and and ran some pretty strong gains and in the fourth quarter. We as spreads came in and we saw the chance to sort of reload the balance sheet.
And and sort of prepare us for it puts us in a good position for next year.
Yeah.
Okay. So is there a.
And he kind of metric for a run rate that we should look at because this is sort of bounced all over the place and this quarter.
Yeah.
25 million, a quarter or something I mean, I'm trying to give us. The do you have any indication as to how we should be looking at that going forward.
Yeah, we've given our run rate for investing activity and the past of and in the neighborhood of 10 to 20 million and after tax and for the F gains <unk> gains and $30 million I would say that that's still roughly in line with where we'd expect to be 30 million of after tax rate of FES.
Okay and.
With the 30 million of after tax gains or not and that.
No and that's not and the investing activity and I've, just kind of answering both because they they kind of relate to each other and sort of the balance sheet strength.
Okay, that's great and the second question has to do with the international hubs and I know you've made a decision.
Really here in 'twenty and 'twenty to move your Hong Kong business, and there and it sounds like.
You know the.
Hong Kong and used to be part of Asia, but now its part of your international hubs business, but I think that was and effort too.
Rolled out more high net worth business and Hong Kong and correct me, if I'm wrong and.
And then when I think of high net worth of business I think of like pretty big face amount policies and I think about pretty big face amount policies I think of paramedical testing and when I think it paramedical testing I think that's pretty tough to do and of COVID-19 environment, especially in Hong Kong, where it locked down so can you is.
Are the sales you are getting in the international hubs in Hong Kong and they largely related to of pipeline.
And you can talk about what's happening with respect to you know the.
High net worth policies, and Hong Kong, which would probably.
Need some paramedical testing and.
How of that looking in light of COVID-19.
Tom It's Dean Leo is going to take that one day and Leo I would suggest is you do also comment on the the local Hong Kong business, because it's a significant business and in part of those results and an important contributor to our to our growth.
Yeah, Yeah, Thanks, Dean Tom Good morning.
So as I mentioned, a little bit earlier on the international hubs.
It is the business that is complicated that has the long lead time, right and we have kind of six to 12 months pipeline for that business.
And so up until now we have benefited from business that started pre.
Pre COVID-19, and the early days of our travel was still possible.
We're now reaching the end of that pipeline.
And the brokers are.
Talking to us and sharing of that that there is a softening of the pipeline.
However, there is a couple of the mitigating factors to that the first one is that.
You look at the international hub business overall.
Ah yes.
And our Bermuda business, our Singapore, President and and the Hong Kong itself.
And the high net worth.
Yes, the high net worth clients in Singapore, and in Hong Kong and that our offshore clients and so there is the potential for sales of people who are currently living in those geographies.
And who are able to do medical exams without traveling so we are benefiting from a profit from that still and I think that will continue.
The brokers that and we're talking to are proving very resourceful and tapping into their existing client base for upsell and cross sell and reactivating dormant pipelines of clients that are.
Geographically.
Able to.
Through the process. So that they are working on on the pipeline, but we think new client and pipelines are going to be more difficult in 'twenty and 'twenty one if the travel restrictions continue.
Tom It's Kevin and I, just might add that just just for clarity. So the international hubs business is made up of what we used to have and Hong Kong, which is our agency business, which has performed quite quite well and we pivoted. The digital quake quickly of broker business that does do high net worth but it does go deeper into the the.
And the market and our MPL business and Hong Kong and then we've we brought in the Bermuda business, which is the international side and added Singapore to leverage kind of the thinking around the high net worth and to leverage the relationships that we have with the brokers. So there's a there's a bunch of components that are inside of the international hubs.
Okay. So it sounds like international hubs is really.
The mixed bag and the decision to.
The move Hong Kong into it was really from an operational perspective to try to get more high net worth business.
Uh huh.
And it may be.
But there may not be a lot of paramedical testing with respect to the business and international hubs and my and my correct and that you didn't address the I'd say.
Different segments, Tom So the the high net worth of business itself I would have.
Underwriting requirements medical line underwriting requirements, but there's other segments of the business. For example, we have a strong local broker business in Hong Kong, which is more mass market or at the one week.
Depending on the product may or may not require medical testing and the.
Then we have our MTF business, where we're the second fastest growing MTF business and Hong Kong and the third largest in terms of AUR and that also contributes significantly to our growth and and we have our agency business, which also is more of a mass affluent type of business.
The strong savings component retirement components health component and so on.
And rich.
And I'll have complicated underwriting requirements and.
And so forth that local business.
Hospitals are open and Hong Kong today, we had seven unlink. The cases people are going about their business.
So if there is the medical exam required for a local clients.
Doing their medical underwriting.
Okay, and then the last one is which which one of those age and segments.
Local markets or international hubs.
And I would have the greater would have the more positive impact on new business.
Honest day off.
Like are the margins the same and the too tight and those two Asian business, but you get more of a gain on sale and the international hubs.
Yeah.
It's fairly.
And he is similar.
Okay, and I know of course is slightly bigger contribution to all around new business gains, but that in the similar ballpark.
Okay. Thanks for that.
Your next question comes from the line of Manny Lowman from Scott to your back of your line is now open.
Hi, Good morning, I just wanted some more clarity on the consolidation of of real estate and North America and you talk about.
$40 million to $60 million charge I'm, just wondering how bold.
And in this issue in terms of how much square feet are we really talking about is this a big change do.
Do you expect a big percentage of the work force to kind of work from home at least part of the time of kind of what's your thinking here in terms of in terms of the outlook for.
And your corporate real estate footprint and how significant is this decision.
So many of his Kevin and if you looked at our our footprint for our own use real estate across North America, including financial centers, It's just under 15% of our space and I think it's a it's a number of things that it's it's our ability to work from home effectively which we've been able to demonstrate the past 10 of 11 <unk>.
<unk>.
It's also you know if you went back and you looked at our office usage and run rates of usage, which is something we look at really closely we did have an opportunity even before COVID-19 to shrink a bit and you know we took.
The opportunity this quarter to to bring both of those pieces together of the financial centers are in the the charge. We took this quarter of 'twenty and the additional office space is coming through in the next quarter, but we think that's a we think that's a reasonable place to land.
Theres still lots of work to think about it in terms of the future of work and how people are going to work and those types of things, but we thought that the.
That this sort of reduction positioned us well.
And I think you talked about the expense savings for the piece you took this past quarter, but for for the charge that you're signaling and 'twenty, one what kind of expense savings from it.
It's roughly $20 million and it may seem smaller on a per dollar basis, and it's partially to do with the.
Future future lease costs, and those types of things and and also reinvesting into the space to create a different sort of workspace for the for the offices.
Okay, and then just a follow up sort of.
What are the implications and your view for the investment side of your business. Obviously, you hold a lot of real estate investments.
This kind of decision that youre, making at the corporate level of how does that and form where you think real estate valuations are going to have any implications.
Many of the Dean Connor and I'm going to ask Steve Peacher to take that one on.
Thanks and.
Thanks, Manny yes, certainly.
Every business is thinking about how they would be working post COVID-19 and we're certainly seeing announcements.
And from some companies vacating space and that obviously raises questions about all of US I would say it.
I would emphasize that you have to keep in mind that the about the institutional real estate markets.
Our huge they're global and they include many different property types. So it's difficult to have just one outlook for real estate broadly.
For instance, there are many areas, where and real estate of doing extremely well for example, they talk greenhouse European funds have generated great returns for investors even during the pandemic because they've been so focused on industrial properties, which continues to show fantastic returns and they're now moving into areas like cold storage, which you're seeing incredibly strong.
And on demand.
It's certainly reasonable to be concerned about the near term outlook for office, but even there it's heavily dependent upon property and and location and for instance, and the.
The office market and Tokyo is very strong and our team there continues to generate high double digit returns by focusing on that asset class at the same time their office properties that are facing vacancy issues and have fun.
Fallen and value.
So I think yeah, I think it's by property type by location I will say the.
The final comment that institutional investors are still very interested and the asset class.
We had a for example, we had our first closing on our and talk Greenough core plus fund in June of last year squarely in the middle of the pandemic and we had higher than target Fundraisings, and our European and Asia and funds just in the fourth quarter.
And and and one other anecdote I know theres been a lot of articles recently about companies vacating space, you're also saying the opposite in some instances I mean I'm in Boston just the announcement last week of Amazon's signed the lease for 630000 square feet and the seaport just.
So.
It's a big sector with a lot of different puts and takes.
Thanks for that Steve.
Yeah.
Your next question comes from the line of Gabriel just Shane from National Bank Financial Your line is now open.
Just a quick one on the reinsurance transaction and I'm sort of to throw at us before but you mentioned the one of the ACA charges. This quarter was the reinsurance transaction and the life of runoff business or the and the states can you tell me of what you're aiming to get out of that and.
And if it's some sort of reaction to the.
Indirect impacts from Covid the Youre anticipating.
So it gave its Kevin will turn that to Kevin Morrissey.
Yeah. Thanks, Gabriel this is Kevin Morrissey.
In the quarter the reinsurance transaction that you noted there was the cost of 53 million that came through and the asthma. The purpose of that was really twofold. One was to ensure some of the large case and mortality exposures you would've heard over the past year or so some of the volatility that we've had and you.
Related to <unk>.
And from large claims so we've taken.
<unk> taken the opportunity to reinsure some of the large exposure. So we do expect the reduction in volatility.
We also got a capital benefit from guests and so that's also noted in our disclosures and it was at one point improvement in terms of the diversification benefit broadly so that was another benefit.
I should note as well of that on an economic basis. So when we look at our best estimate assumptions and this was positive so of the strain is really coming from the <unk>, which we expect to come back into income over time.
Okay.
And on the capital and management front understanding that there are some restrictions on distributions.
If those restrictions were lifted tomorrow.
Would you be looking at the raising.
The raising the dividend, but it looks like you're going to be the low and if not below the low end of your payout ratio of this year of.
We don't see any big noise and the and the world.
The.
How do you view that.
Gabriel It's Dean went osophy lifts the moratorium on dividend increases whenever that happens we do expect to.
To resume of pace of regular dividend increases and our intent will be to land the dividend payout ratio in that 40% to 50% range. As you noted I think for the year. We were we were at the lower end of that range, I think and the quarter, we slipped a little bit below it.
And and those MTO is do apply over the medium term. So you know you can expect to see us get back to that range over some period of time and that period of time is to be determined.
Right. Thank.
Thank you.
Your next question comes from the line of Paul Holden from CIBC. Your line is now open.
Good morning.
Two questions.
First is related to U S group and maybe just the number.
The state.
Pricing conditions and.
Stop loss and.
All right.
Benefit plans with the true.
The renewals.
Thanks, Paul.
And we did see some intensification of price competition, especially in the fourth quarter.
And as was noted earlier some of our competitors really did not have.
The great sales results during the year and it would seem that some of them were trying to make up for that towards the end of the year.
And had good sales results throughout the year. So we were able to stick to our guns and price within our pricing targets overall on both new business and renewals, but in both stop loss and group, we did see some increase in price competition and the fourth quarter.
Thank you for that.
Second question is related to.
Run off business I guess it applies to both.
And.
And the UK and I know Dean you Dean.
Very consistent and answering questions on this from the past and term.
<unk>.
Unlocking future profits and.
And cash flow is by optimizing those businesses, but we're seeing and increased activity and transactions and increased appetite true new players and I'm wondering if that swing.
Swing, the economics, and all of that might part of that transaction.
More favorable light.
And then the has been historically.
And thanks, Paul It's Dean here, you're right and and that our focus the job one has been to really run those run off businesses, well to optimize them for tax and capital and use of reinsurance and expenses and and so on investments.
So and you're right to note that in some places.
And there's been an uptick and activity to acquire close blocks, including.
And private equity getting increasingly involved in that space, but I would say to you for over a number of years has been there's been a lot of transactions going on.
Both in the U K market and in the U S market around the closed block business.
Back in 2013, we sold our our annuity business as you recall and there was a it was a robust process at that time so.
I think I think there is good demand out there. It's it's good to have that optionality.
If and when we take advantage of it.
But for now we're going to continue the ought to try to optimize those businesses.
Great. Thank you.
Your next question comes from the line up the dog young from data of <unk> capital.
Good morning, and I'll try to keep this quick just lots of expense lapse experience was negative 18 million and this quarter. If I go back and it's been negative quite consistently for many quarters I know you did enact the charge.
And on lapse and and we're still seeing the negative experience of hoping just to get that you can flush it out a little bit more of what youre seeing on the life side and whether you think of is this just the temporary item around COVID-19 or is there something more behind this.
The Doug, it's Kevin strain and I will let Kevin Morrissey and address that one.
Kevin Morris he might be on mute.
Yeah.
If if kevin's dropped I'll I'll take I'll take a crack at it and see if he comes back on Doug but.
Got it.
My phone so.
And so the question okay.
Yeah, we did have each of millions of losses in the quarter. So that was a bit disappointing looking across the business. He had single digit losses across the board eat line. So it wasn't concentrated in any one business as well it wasn't just lot so looking into it and deep dive a bit investigating the sources.
We had about half of it was from lapses.
Of it was from other policyholder behavior like resets on the options take up rates on some of them and you were translation guarantees reinstatement of conversions and the like.
So lots of investigating the sources of our Q4 experience I would say I'm not concerned at this point. Despite the fact that the result.
I forget was disappointing so I guess to answer your question directly.
And I'm hopeful that this is.
One of those quarters, where everything seems to just go against us and we will have to Boston and look in the future.
And how that will.
Of that well.
And turnaround hopefully I will see something different from the next quarter.
Okay, and then just second on Asia, the $20 million impairment should the joy of JV and India can you just.
Maybe talk a little bit more about what that related to.
Leo you want to take that.
Yeah, I'll take that one.
Thanks, Doug so the the impairment it's relate.
Related to and investment we made in the fund with our joint venture partner in India to support the development of the business.
And given what's happening right now and with market conditions, and COVID-19, the funds underperformed and we've needed to take the $20 million write down based on current valuations.
So do you still own that like is that it could be that would be written back up again like and where are we going to see that the level of volatility.
Yes, possibly.
Yeah, Doug just to be clear, we do still own that investment.
Okay and like you know.
The loss.
Yeah, you have to look at you have to look at the the.
The real estate market and in India, which and India is a fast growing economy right. They're expecting you know close to 10% GDP growth next year.
Yeah.
Okay, great. Thank you.
Your next question comes from Nigel D'souza from Veritas investment Research. Your line is now open.
Thank you good morning, I had a quick question for you and earnings on surplus I noticed this quarter you had a nice rebound and.
And investment income I was wondering if you could piece of the drivers there and how you mentioned leveraging SLC and on the go forward basis do you expect earnings and surplus stabilize at current levels or do you see of pathway.
We're generating higher earnings on surplus.
Yeah. So the the earnings and surplus as you know were 114, so a bit above our run rate and I would say that this was a fairly strong quarter for the earnings on surplus in fact the.
The lower <unk> gain that we are the b hit to the Indian and real estate assets, which resulted in lower <unk> gains and we just talked about came through the surplus line. It was offset by some higher.
The seed capital returns you may remember from the.
The first quarter, we had some seed capital losses, and and we continue to see some of that come back and we used the had some higher <unk>.
P distributions overall I would say that at $114 million, that's probably on the higher side of what we would expect surplus to be and it's been coming down with with the yields coming down over the the past few years.
So and if I was thinking about a number there I think closer to 100.
And that's very helpful. Appreciate the color.
Yeah.
Your next question comes from the line of Circle.
I mean, Alex your line is now open.
Hi, Thank you good morning, I think my questions for Kevin and Kevin.
And how do you use of annual numbers to sort of explain when I'm looking at here, which is expected profit growth and Canada and Asia.
So when I look at 2018, and Canada, 5% expected profit growth the ACA.
Celebrated the 10% and 2019 and now 14% and 2020 when I look at age of the opposite trend was at 17% and 2018 fell to 6% and 2019 and now below 4% and 2020.
So the question is are these trends expected to continue in terms of growth of EPS what caused it.
And of the point, what I'm looking for really is the sort of general view on expected profit growth for each of these business lines, and 2021 and and and beyond thanks.
Darko, it's the Dean Thanks for that question I think why don't we start with just break it into Asia, and Canada will start with Leo to comment on the trajectory and Asia and the and how we're thinking about that and and Jacques and comment on Canada.
Yes, good morning, Darko, if you look at the trend and Asia, you're right Q4 expected profit was at.
At about 5% versus prior year.
And what's happened in this quarter is that we have business growth, which was offset by higher planned expenses in our regional office to support the growth of the business now the planned regional offices office expenses were actually reduced or deferred this year.
And given.
The general market environment, and our expense discipline.
Which resulted in a favorable expense experience. So this isn't the accounting geography here.
Important.
And Kevin alluded to that earlier, a few accounts for the savings we experienced in our planned expenses and the regional office expected profit would have been up 9% year over year.
Now if you look at our business in Asia, we have a number of markets that are not yet at scale.
In terms of our growth we've got a little kind of expected profit, but we also look at new business gain.
And if you combine the expected profit and new business gains together at the <unk>.
Growth rates of these two components would have been and the mid teens.
And if you accounts for the geography of the savings and the regional office expenses, you would actually be of two percentage points higher than that.
And so.
And the fundamentals of the business if you look.
Expected profit plus new business gains.
And we are seeing double digit.
Growth and the business.
This is Jack.
And in Canada.
And I would say, it's not the one thing its many things and the way it's.
And that's a big focus from an expense and discipline and that's.
Looking for a better mix and pricing properly.
Continuing to invest in digital and to give you an idea.
We've talked about before our digital and coach Ella.
All of us getting smarter and smarter, so and 2020.
We gave clients something like 15 million and nudges.
Led to $700 million of deposits and.
And the $1 billion of additional coverage and insurance.
It's a number of things one of the things I would say and point out is.
And I put it to about half half of it is business growth half of it is expense.
Discipline.
I mean of course as you can imagine the X.
Tens of discipline and at some point in time and it will stabilize and.
But when you when you look back at it.
Okay.
It sort of speaks to the underlying.
Strength of all of our businesses, we are of the leader and.
And in GB and GRS and as you know we're leaders in individual insurance.
And you were just running the business very well and and.
It speaks of the earning power of the.
The division and certain.
And in line with the MTO.
And just a quick follow up on that if I may with respect to the business' growth and you mentioned the digital and is it safe to say that this is still early days.
Or.
<unk>.
And what was was the business growth somewhat of a high pace and you expect it to moderate now of that.
These nudges of sort of like where the not just sort of slow down and should I expect business growth to slow a little bit going forward.
Now that it's a little more mature.
Well, it's and it's tough to see the Arco because in a way.
And the number of our businesses where things are still early.
No Kevin and his remarks talked about the <unk>.
Acceleration of digital investments, so I would say, Canada had been on that path for a number of years.
But we are continuing to really put a lot more focus on digital.
Paying a greater role and health for example, you saw the investment we made in the virtual care.
The last year.
I would point you out of it also to some of our growth engines.
Coming to a nice level of maturity. So one example, I'd give you is that sort of July as you know.
It's a business that we started 10 years or so ago and.
And it's contributing nicely in terms of momentum now because we cross the path of profitability. So so you know theres lots of runway ahead of us when it comes to our growth engines.
Great. Thank you.
We have no further questions at this time and all of their games student Ms Chalmers for closing remarks.
Thank you and I would like to thank all of our participants today. If there are any additional questions. We will be available. After the call should you wish to listen to the broadcast it will be available on our website. Later this afternoon and thank you and have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
[music].
Yeah.
[music].
And.