Q4 2020 Sun Life Financial Inc Earnings Call
[music].
Good morning, Ladies and gentlemen, my name is blue and all of the a conference operator today at the.
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 place will need 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 relationships and capital management. Please go ahead and the challenge.
Thank you Blue and good morning, everyone and welcome to Sun Life Financial's 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 Dot com.
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 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 <unk> 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.
2020 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 <unk>.
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 the lasting change and eliminate systemic racism.
At Sun Life, we started the series of dialogues and training around racism, we set a goal to have 25% of executive roles staffed by underrepresented, the ethnicities and North America by 2025, 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 MD&A. We have included our first climate change disclosures under the financial stability Board Task force on climate related financial disclosures or <unk>.
At the end of March we will publish our 2020 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 for reported net income of $744 million grew 3% over the prior year, while underlying net income grew by 9% to $862 million underlying.
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 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.
AUM 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 the.
<unk>, we entered into a 15 year Bancassurance partnership with Asia commercial joint stock Bank or ACB, which started last month. This partnership complements the exclusive bank of partnership with TP Bank and Vietnam that started a year ago January and and its first year nearly doubled our Vietnam safe.
<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 2020 up 69% from 2019.
And that will also help 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.
And our artificial intelligence and predictive modeling accelerated and improve the individual insurance application process with 71% of policies underwritten 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 legislation continues to evolve absence management is becoming increasingly complicated for employers, particularly those who operate in multiple states.
To date, we of onboard of nearly 10000 employer clients to our new state of the art claim system that will enable us to coordinate absences as a single event across all benefits.
And the fourth quarter, we launched the digital non face to face sales platform and Malaysia, and we now have virtual sales experiences and each of our markets across Asia.
And finally this year, we introduced digital enterprise across the company, bringing together the business and 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 have a distinctive digital experience integrated across life health and wealth.
Turning to slide six I'll touch on some highlights from our full year 2020 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 and 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.
Wealth and asset management sales grew 39% to $221 billion with strength across all of our businesses.
We also reached a milestone of 125 trillion dollars of AUM.
MFS finished the year with four quarters of net inflows totaling <unk> $13 1 billion for the year and continue 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.
<unk> 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 <unk> of this year.
Broadening the solutions, we bring to institutional clients and bringing Slc's third party AUM to 145 billion on a pro forma basis.
On slide seven.
We'll see how we were there for our clients and 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 saw during the pandemic.
We enrolled over a half of million Canadians and of new virtual health care service through luminary health and dialogue.
Our client index score measures how are clients of rate us 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.
And is showing up and results for clients.
When I stand back from this.
I'm incredibly proud of all of that we accomplished in 2020.
It was of hard year for people for communities for countries around the world yet it was the year that showcase the tremendous determination 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 you.
Yet there's every reason for optimism as vaccines are rolled out around the world.
Sun life is well positioned for 2021 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.
2021 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 and I retire in August.
And 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, where the focus on helping clients achieve lifetime financial security and live healthier lives and the 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 and this.
And this is what inspires me and motivates me and Sun life is all around the world.
And Im 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.
Changes in management actions reported net income also included higher fair value adjustments on MFS share based awards.
And reflecting strong performance and the year.
The 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 <unk> impairment and Asia.
Credit experience in the quarter was a positive $18 million of good result, underlying EPS for the quarter was $1 47 up 10% compared to the same period, a year ago, while underlying ROE increased by 40 basis points for 15, 4% above our medium term objectives of 12% to 14%.
Assets under management increased to 125 trillion.
And increase of 13% year over year, driven by positive market movements 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 Sof and 127% at SLA, the SLR ratio increased by 3% quarter over quarter, largely due to the $750 million subordinated debt offering completed on October the first.
The <unk> ratio was in line with Q3 at 127% and reflects the capital put into SLA from Sof 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 <unk> 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.
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 low.
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 impact of the new reinsurance agreement and our in force management business on.
On an underlying basis net income and 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 desk, 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 billion and SLC.
SLC management underlying net income to $34 million on strong contributions from biggio 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 impairment relating to an investment and managed by our joint venture and India. This was partially offset by higher new business gains in the international hubs and favorable expense experience.
And our corporate segment, which includes the UK 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 UK and other runoff businesses and lower project spend and corporate support compared to 2019 slide.
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.
A more modest 5% as growth and the business of 9% was partially offset by higher planned regional office expenses.
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.
<unk> experience was unfavorable in the fourth quarter, reflecting investments in digital and in GB 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 included 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 from the U K, which is reported in our corporate segment morbidity was favorable on lower incidence and Canada and the U S and credit experience 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 <unk> 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 and and Asia 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 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 and insurance sales were down 18% from the prior year due to lower group benefit sales as fewer sales of come to market.
While sales increased 15% compared to Q4 2019 with 19% growth in the 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 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 kind.
<unk> of 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.
<unk> 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 impacted 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 new run rate expenses as well as higher contractual volumes from the sales compensation and commissions full year operating expenses were up only 2%.
Sent from the prior year on the 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 the.
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 of the office and of post Covid environment. Starting this quarter, we began reducing and consolidated and a 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 the 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 8% to 10%.
Underlying ROE was 14, 4% and 2020 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 2020, we closed the Crescent capital acquisition at SLC management.
As a reminder, we're looking forward to hosting you virtually at our 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.
2021 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 of our participants have an opportunity to ask questions on todays call I would ask each of you to please limit yourself 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 the number one on your question on the telephone.
And for your question and that's been answered part of you wish to remove yourself from the queue. Please press the donkey.
Your first question 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 are for.
First question is from Mike regarding MFS.
The margin of 41% was clearly very strong and I think last quarter you talked about.
The margin kind of expectation to be in the mid to mid to high 30% range and normal markets.
Based on where we are today and assuming a cooperative market is there any reason why we shouldnt expect margin to stay at kind of.
The current level, and maybe even a little stronger and yoga.
The net asset growth.
Good morning, Humphrey, It's Mike Roberge.
As we've indicated historically, we think through the cycle of normal conditions and the margin should be and the mid to high thirties and alike.
Yes, you are really off the market bottom with the S&P of 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 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 a get a correction of 20% you may see of down below that guidance that we've provided as well. So we continue to be comfortable that through the cycle.
And that 30% to 35% if the margin stays strong and we're going to be at the higher end of that on weaker margins will be at the lower end of that and beyond that I wouldn't give any more guidance.
Okay. Thank you.
And then in U S group benefits can you talk about the the various impacts that you've seen across the product lines.
From the from COVID-19, it seems like you are one of the outliers in the marketplace in terms of still seeing strong margins kind of through for.
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 moving pieces in 2020, 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 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.
But that business has a different impact on the bottom line because.
Of the older Ages and that group is.
So 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.
The ability perspective, we have not seen significant impacts and the LCD 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 very strong results and stop loss.
And helped to mitigate some of the negative impacts such as mortality.
The other aspect of this is sales.
Sales of remains strong for us they were up year over year.
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 John Aiken from Barclays. Your line is now open.
Good morning.
Success that you've had growing on the SLC management is obviously quite apparent with the that the growth and earnings contribution, but again on a quarterly basis and spend 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 the expectations specifically for red and.
Perino please.
Hi, John and Steve Peacher, and I can answer that.
Yes.
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 that's all 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 that helped us and the quarter.
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 have final.
<unk>.
And Youll see performance fees as those come due so that'll add of.
And every now and then we're going to get the benefit of the data won't be every quarter.
Look at the different businesses, obviously infrared closed this pad and the summer of 2020.
The Green Oak deal closed a year before that 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 $3 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 <unk>.
And January with the first with the close on their latest direct lending fund as well as pricing of new CLO. So.
It's always the competitive market, but we feel like each businesses.
<unk> is performing well.
Thanks for that Steve I'll re queue.
Okay.
Your next question comes from the line of David <unk> 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.
And.
I guess do you see do you foresee any any big changes to the to the strategy.
And also specifically around capital allocation once you take the range during the summer.
Yes.
I've worked with the <unk> closely on the strategy of <unk>.
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 now as the CFO for three and a half years I feel like I've had a big input on the on the strategy I do see us really emphasizing digital.
We rolled out a project called digital enterprise, which was really about how working more agile working world of digital company, bringing it and the business closer together, but also on the west side of doing more and digital and continuing to be aggressive.
You can see just the impacts on digital through Covid and how quickly we pivoted. So we will continue to emphasize that the.
Sustainability I think is the big topic for every company now, including diversity inclusion and Dean started his comments at the start of the.
On the call on sustainability, and ESG and I think that's going to be an important topic, obviously my time and Asia.
And a big influence on me and Asia has been a big priority for us in terms of capital deployment and I see that the continuing to happen and so.
I've had the great honor to work really closely with Dan on the strategy I feel like I've had the input on the strategy and that we're going to build on that success and the strategy we put in place.
Great and then just a quick follow up on that do you see yourself 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.
We've I think we've got a great footprint.
We're in 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 my focus would be the same as its been the last few years is building scale. So you saw us do two trans.
Actions on the bancassurance side and Vietnam.
And I was quite involved and those as Dean and Leo of course, and Larry Madge Who's the CEO of there, but those types of transactions, where we're building distribution capability, we're building partnerships and where we're building and the.
Market that we think has huge potential I think those are good examples of the types of things that will be our focus.
Okay that makes sense 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 said and the $800 million range per year.
Earnings have clearly grown I think send you essentially last gave that update so how are you thinking about cash flow. The these days.
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 higher for Us earnings.
As we as we sort of go forward.
Yes, 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 I would say that roughly and that same range. We are also investing and new businesses and those types of things. So I would have that number and mine as we get closer to <unk>, we'll spend some more time on how to think about the business post IR for <unk> 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.
Not talked about too much in the past, but just that and maybe broadly just on the progression of that new segment, and perhaps plan and outlook.
You see on insurance and wealth side over the next few years.
Scott and <unk> I think we will ask 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 hub.
And as you said it was another strong quarter for that business segment.
The the results of the outcome of our strategy with that business over the last few years.
We've obviously been and the international 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.
One of the early parts of that strategy was to bring the international business into Asia.
Subsequently, we ended up bringing together of the international business with our 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 it's much more closely.
Bringing together our broker relationships across the region and so you can imagine a much better alignment of the relationship.
And orchestration and much better service for these brokers. It's also allowed us to leverage our capabilities in terms of product development.
We've made significant investments in digital and technology capability as well, which have also improved.
The operations and ease of doing business for for brokers.
And just generally positioned us the more strongly with <unk>.
More significant scale for example for.
For the balance sheet, and reinsurance standpoint, and so what youre seeing and some of the results is really the byproduct of that focus.
And in a business that requires a lot of expertise and.
And what are their barriers to entry and so we're benefiting from that right now.
And now in terms of what's happening with <unk>.
COVID-19, there is some uncertainty because.
This is the business.
That has a long lead time and safe.
The 12 months to go through and Onboarding process with the client.
Up until now we have strongly benefited from the pipelines that we started to build a year ago, and so and that momentum.
Q4 sales continued to be strong, but I would say there has been some.
Some softening of of the pipeline given travel restrictions.
And just a quick follow up you talked about expansion into the Singapore market is.
Is there any other expansion opportunities and to other regions and maybe you can comment on sort of more of the Singapore specifically.
Yes.
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.
Pacifically in terms of Singapore.
We acquired our license the last year and the middle of last year and.
And we've been.
<unk> the launch of the office and it's been going well, we're establishing and network of distributors and Singapore and Thats.
Proceeding of pace and then we're also preparing for regulatory approval of our first product and Singapore and so all of that is on schedule and we expect to start.
With that.
And as we get the required regulatory approvals on our product.
Great. Thank you very much.
Your next question comes from the line of Mackinnon from BMO Capital. Your line is now open.
Yes, thanks very much good morning.
The two questions. The first is with respect to.
<unk>.
Experience gains you mentioned, there were some asset repositioning and the quarter.
So I guess that net.
And they are sourced assets that you didn't have any kind of significant yield enhancement.
Activity.
As a result of this asset repositioning does that what does that imply for.
The outlook for it.
And investment experience gains going forward.
And Tom It's Kevin most of that was in Canada and was sort of a reloading of the balance sheet. You would have seen that we took advantage of the strong balance sheet early and the COVID-19 and and ran some pretty strong gains and in the fourth quarter. We.
As spreads came in and we saw a 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.
Okay. So is there.
Any 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.
25 million, a quarter or something I mean, I'm trying to give us do you have any indication as to how we should be looking at that going forward.
And we've given a run rate for investing activity and the past of and the neighborhood of $10 million to $20 million after tax and for AF gains gains 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 are not in that.
No thats not in the investing activities.
And kind of answering both because 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 made a decision.
Earlier in 2020 to move your Hong Kong business, and there and it sounds like.
No.
Yeah.
Hong Kong and used to be part of Asia, but now its part of your international hubs business, but I think that was an effort to build.
The build out more high net worth of goodness, and Hong Kong and correct me, if I'm wrong and.
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.
And when I think of 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.
Are the sales you are getting in the international hubs and Hong Kong are they largely related to our pipeline and.
You can talk about what's happening with respect to.
The.
The high net worth policies, and Hong Kong, which would probably.
Need some paramedical testing.
And how of that.
And in light of COVID-19.
Tom It's Dean Leo is going to take that one and Leo I would suggest is you do also comment on the the local Hong Kong business, because that's of significant business and in part of those results and an important contributor to our to our growth.
Yes.
Yes, thanks studying Tom good morning.
So as I mentioned and a little bit earlier on the international hub.
And it is.
And as a 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 COVID-19 are and the early days of our travel with the possible.
We're now reaching the end of that pipeline.
And the brokers are.
Talking to us and sharing of that there is a softening of the pipeline.
However, there is a couple of the mitigating factors to that the first one is that if.
If you look at the international hub business overall.
And.
Yes.
Our Bermuda business.
Singapore President and.
And the Hong Kong itself.
Of the high net worth.
You have high net worth clients in Singapore, and in Hong Kong and that our offshore clients and.
And so there is there is 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 from.
And from that still and I think that will continue the.
Brokers that we're talking to are proving very resourceful and tapping into their existing client base for upsell and cross sell and reactivating enrolment pipelines of clients that are geographically.
And <unk> to go through the process so the.
We are working on.
The pipeline, but we think new client pipelines are going to be more difficult in 2021, if the travel restrictions continue.
From its 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 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 market and our NPS business and Hong Kong and then 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 theres a theres a bunch of components that are inside of the international hubs.
Okay. So it sounds like international hub 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.
And.
And it may.
But there may not be a lot of paramedical testing with respect to the business and international hub.
Am I, correct and that you Didnt address.
And.
Different segments, Tom So the the high net worth business itself would have.
Underwriting requirements medical underwriting requirements.
The other segments of the business. For example, we have the strong local broker business and Hong Kong, which is more mass market or affluent.
Depending on the product may or may not require medical testing and then we have our MTF business, where we are the second fastest growing MTF business and Hong Kong and the third largest in terms of of you and that also contributes significantly to our growth and and we have our agency business, which also is.
More of a mass affluent and type of business.
And with a strong savings component retirement components.
<unk> components, and so on and rich.
And rich.
And I'll have complicated underwriting requirements and.
For the local business.
Hospitals are open and Hong Kong today, we had seven and linked cases people are going about their business.
So if there is the medical exam required for a local clients.
Doing their medical underwriting.
And.
Okay, and then the last one is which which one of those Asian segments.
Local markets or international hubs.
And would have the greater 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 the gain on sale and the international hubs.
It's.
Fairly similar.
Okay, and I know of course, it's slightly bigger contribution to all around new business gains, but letting the.
Similar ballpark.
Okay. Thanks for that.
Your next question comes from the line of Manny Globin from Scott to your back of your line is now open.
Hi, Good morning, just wanted some more clarity on the consolidation of real estate in North America, and you talk about for.
$40 million to $60 million charge and just wondering how bold.
And this.
The issue in terms of how much square feet and we're really talking about is this a big change do.
Do you expect the big percentage of the work for us too.
And 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 for.
Your corporate real estate footprint and how significant is this decision.
For many as Kevin and if you looked at our our footprint for our own use real estate across North America, including financial centers is just under 15% of our space and I think it's a number of things.
Our ability to work from home effectively which we've been able to demonstrate the past kind of 11 months.
And it's also 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 it's.
And we took the opportunity this quarter to to bring both of those pieces together of the financial centers or in the charge. We took this quarter of 'twenty and the additional office space is coming through in the next quarter, but we think that.
We think thats a reasonable place to land.
And there's still lots of work to think about it in terms of the future work and how people are going to work and those types of things, but we thought that.
And that this sort of reduction positioned as 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.
It's roughly $20 million and it may seem smaller on a per dollar basis, and it's partially to do with <unk>.
Future future lease costs and those types of things and also reinvesting into the space to the create a different sort of workspace for the for the offices.
Okay and then just.
The 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.
And 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 its Dean Connor and I'm going to ask Steve Peacher to take that one on.
Thanks for the Hi, yes. Thanks.
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 office I would say.
I would emphasize that you have to keep in mind that the about the institutional real estate markets are 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 continue to show fantastic returns and they are 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.
And location and for instance, and.
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 they are office properties that are facing vacancy issues and if <unk>.
Fallen and value.
So I think yes, I think it's.
By property type by location.
I will say.
The final comment that institutional investors are still very interested and the asset class.
We had a for example, we had of first closing on our first of all.
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 Asian funds just in the fourth quarter.
And and one other anecdote I know theres been a lot of articles recently about companies vacating space Youre also seeing the opposite in some instances I mean I'm in Boston, just and 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.
Okay.
Your next question comes from the line of the real just Shane from National Bank Financial Your line is now open.
Just a quick one on the reinsurance transaction I'm sort of fit together before but you mentioned the one of the act and the charges. This quarter was the reinsurance transaction and the.
The life for runoff business or the.
The states can you tell me of what you're aiming to get out of that and.
Is it some sort of reaction to the.
The indirect impacts from Covid that youre anticipating.
So it gave its Kevin will turn that to Kevin Morrissey.
Yeah. Thanks, Ken This is Kevin Morrissey.
In the quarter of 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 mortality exposure.
We have heard over the past year or so some of the volatility that we've had in the U S related to Ias from large claims so.
Taking the opportunity the reinsurer some of the large exposure. So we do expect the reduction in volatility.
We also cut our capital back.
From that 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 and sure.
Note as well that on an economic basis. So when we look at our best estimate assumptions and this was positive. So 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 <unk>.
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 for.
Don't see any big noise in the in 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 resume of pace of regular dividend increases and our intent will be the land the dividend payout ratio in that 40% to 50% range. As you noted I think for the year we were.
We're at the lower end of that range, I think and the quarter, we slipped a little bit below it.
And and those MTO do apply over the medium term so.
And expect to see us get back to that range over some period of time and that period of time is to be determined.
Right.
For you.
Your next question comes from the line of Paul Holden from CIBC. Your line is now open.
Thanks, and good morning too.
Two questions.
First is related to U S group, and maybe just kind of.
Update on.
And the conditions both of them.
And.
Stop loss and and.
Floyd.
Benefit plans with.
With the January renewals.
Thanks, Paul.
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.
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. We had 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 in the fourth quarter.
Thank you for that.
Second question is related to.
Runoff business and I guess it applies to both of you.
And in the UK and I know D and E beam.
Very consistent and answering the questions on this and the past and <unk>.
<unk>.
Unlocking future profit and.
And cash flow is by optimizing those businesses, but we're seeing and increased activity and transactions and the increased appetite true new players and I'm wondering if that's.
And when the economics at all of that and Mike.
The transaction.
More favorable life than than the has been historically.
Thanks, Paul It's Dean here Youre, right and that our focus 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 are right to note that in some places.
And theres been an uptick and activity to acquire closed blocks, including.
Private equity getting.
Increasingly involved in that space, but I would say to you for over a number of years. There 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.
And 2013, we sold our our annuity business as you recall and there was was the robust process at that time so.
I think I think there is good demand out there and it's good to have that Optionality if and.
And when we take advantage of it.
But for now we're going to continue to try to optimize those businesses.
Great. Thank you.
Your next question comes from the line, Doug Young from data of <unk> capital.
Good morning, and I'll try to keep this quick just lots of expenses lapse experience was negative $18 million. This quarter. If I go back and it's been negative quite consistently for many quarters I know you did and Akamai charge.
And on lapse, and we're still seeing the negative experience of hoping just to get and if you can flesh 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.
And Doug, it's Kevin strain and I will let Kevin Morrissey address that one.
Kevin Morrissey might be on mute.
Yeah.
If kevin's dropped off the I'll take I'll take a crack at it and see if he comes back on and Doug.
Got it okay.
Okay got it.
Yes, my phone and thanks for the price Okay, yes.
Yes, we did have a million of losses in the quarter. So that was a bit disappointing looking across the business. He had single digit losses across about equal items.
It wasn't concentrated in any one business as well it wasn't just lot so looking into the deep dive a bit investigating the sources, we had about half of it was from lapses.
It was from other policyholder behavior like resets on the options take up rates on some of them and utilization 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 in aggregate with disappointing. So I guess to answer your question directly.
And I'm hopeful that this is.
One of those quarters, where everything seemed to just go against us and we will have to Boston.
And I look in the future.
And how that will.
And that will.
And turnaround hopefully, we will see something different for the next quarter.
Okay, and then just second on Asia, the $20 million impairment to the JV and India can you just.
And you talked 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 is 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 needed to take the $20 million write down based on current valuations.
So do you still own that like is that could be not be written back up again, and we're going to see that level of volatility.
Yes, possibly.
Yes, Doug just to be clear, we do still own that investment.
Okay.
Loss.
Yes, you have to look at it you have to look at the.
The real estate market in India, which and India is a fast growing economy, right theyre expecting close to 10% GDP growth next year.
Yes.
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 on surplus stabilize at current levels or do you see of pathway.
We're generating higher earnings on surplus.
Yes, 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 earnings on surplus in fact the.
The lower FX gain that we are the.
The hit to the India, and real estate assets, which resulted in lower <unk> gains. We just talked about came through the surplus line. It was offset by some higher.
The seed capital returns you may remember from the.
First quarter, we had some seed capital losses, and we continue to see some of that come back and we had some higher LP 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 past.
Two 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 cycle.
Your line is now open.
Hi, Thank you good morning, I think my questions for Kevin and Kevin.
And none of us 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 accelerated to 10% and 2019 and now for 14% and 2020 when I look at Asia. The opposite trend was at 17% and 2018 felt the 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.
More to the point, where I'm looking for really is the sort of general view on expected profit growth for each of these business lines, and 2021 and <unk> and beyond.
Darko, it's dean Thanks for that question I think why don't we start we'll just break it into Asia and Canada, We will start with Leo to comment on the trajectory and Asian, and how we're thinking about that and then Jacques and comment on Canada.
Yes, good morning, Darko if you.
And look at the trend and Asia, you're right Q4 expected profit was.
And at about 5% versus prior year.
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 there's an accounting geography here.
<unk>.
And Kevin alluded to that earlier, if you account for the savings we experienced in our planned expenses and the reasonable 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.
And in terms of our growth, we get 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 the growth rates of these two components would have been and the mid teens.
And if you account for the geography of the savings and the regional office expenses, you would actually be a few percentage points higher than that.
So for.
From the fundamentals of the business if you look.
Expected profit plus new business gains.
We are seeing double digit.
Growth and the business.
Alright go disclosure and.
And Canada.
I would say, it's not one thing, it's many things and the way it's.
Yes, the big focus on expense discipline and that's.
Looking for a better mix and pricing properly.
It's continuing to invest in digital and give you an idea.
I think we've talked about before our digital and coach Ella.
And that is getting smarter and smarter, so and 2020.
We gave clients something like $15 million nudges.
And that led to $700 million of deposits and the $1 billion of additional coverage and entrance.
Yes.
It's a number of things one of the things I would say and pointed out.
And put it to about half and half of it this business grow and kind of all of this is.
Yeah.
<unk> discipline.
And of course as you can imagine.
The expense discipline and at some point in time and it will stabilize and.
But when you when you look back at it I would say.
It sort of speaks to the underlying.
Strength of all of our businesses, we are the leader and.
And GB and GRS and as you know we're leaders in individual insurance and <unk>.
And we're just running the business very well and.
Got it.
For the earning power of the.
The vision.
Certainly 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.
Sure.
What was the business growth somewhat of a high pace and you expect it to moderate now that.
These nudges of sort of like one of the not just sort of slow down and should I expect business growth the slow a little bit going forward.
Now that it's a little more mature.
Well, it's tough to see the Arco because in a way and I know.
Number of our businesses.
Things are still early.
Kevin and his remarks talked about the.
The acceleration of digital investments and I would say, Canada had been on that path for <unk>.
Number of years.
But we are continuing to really put a lot more focus on digital.
Playing a greater role and help for example, you saw.
And that we made in the virtual care.
Halfway through last year.
I would point you out also to some of our growth engines for.
Coming to a nice level of maturity. So one example, I'd give you is that for all Gi and <unk>.
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 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 that will <unk> 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.
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