Q1 2021 Sun Life Financial Inc Earnings Call
Yeah.
Yeah.
Good morning, Ladies and gentlemen, my name is Adam and I'll be your conference operator today at.
At this time I would like to welcome everyone to the Sun life financial Q1 2021.
As a result conference call.
All lines have been placed on mute to prevent any background noise. After.
The speaker's remarks, there will be a question and answer session.
The host of the call is yaniv.
Vice President head of Investor Relations and capital markets. Please go ahead Mr. Burton.
Thank you Adam and good morning, everyone welcome.
Welcome to Sun Life's earnings call for the first quarter of 2021.
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 the first quarter results by Dean Connor Chief Executive Officer of Sun life.
Following Dean's remarks Magic thing Executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After their prepared remarks, we will move to the question and answer portion of the call.
Other members of management will also be available to answer your questions. This morning.
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.
And as noted in the slides forward looking statements may be rendered inaccurate by subsequent events.
And with that I'll, now turn things over to Dean.
Thanks, you and Eva and good morning, everyone. Let me start by saying, we're thinking about our friends and colleagues clients and their families and India as the country faces. This most extraordinary wave of infections, while our India employees have been working from home since the start of the pandemic. We know that this has been a very difficult.
Time for all of them, we're working with our local teams and health officials to provide additional care and support for our people. We made a donation to India Red Cross and supporting local charities to help vulnerable people with some of the basics such as groceries.
Or broadly well were not on the other side of this pandemic yet there is every reason to be optimistic as the rollout of vaccines builds momentum around the world.
Turning to slide four reported net income of $937 million for the first quarter was up significantly over the prior year unfavorable market related impacts.
Underlying net income grew by 10% to $850 million and underlying earnings per share grew 11% over the first quarter of last year.
We generated a strong underlying return on equity of 15, 3% in the quarter, our capital and cash positions continue to remain healthy and along with our low financial leverage ratio of 22.7% provides flexibility and opportunities for capital deployment.
I wanted to step back for a moment on the quarters results and talk about something that has been a longtime priority for sun life and that is sustainability. Our approach to sustainability focuses on what we know best financial security and healthier lives and sustainable investing and we're embedding that into our business.
For example in February we announced the creation of 34 affordable housing units as part of a new 300, plus unit apartment building were finishing in the region part Park neighborhood of Toronto and partnership with Daniel's Group and the city of Toronto. These 34 apartments will be leased at roughly half the going market rents.
Through a program that helps homeless or inadequately, how single mothers to achieve lasting economic self sufficiency and if you own one of our Sun life participating whole life policies, you'll be glad to know that your par fund owns a significant share of this new building.
In March we set a goal of making an additional $20 billion and new sustainable investments over the next five years across our general accounts and third party investments and that's in addition to the $60 billion of existing sustainable investments.
And starting this year and business operations around the world for Sun life, and MFS will be carbon neutral.
You'll be hearing more from us on how Sun life is making a difference on sustainability for our clients our employees our communities and future generations.
Coming back to the quarters financial results wealth sales and asset management gross flows were up 10% driven by strong growth sales at SLC management and higher wealth sales in Asia over the first quarter last year, we ended the quarter with 1.3 trillion dollars and assets under management up 26.
6% over prior year.
MFS continued to deliver strong long term investment performance with 97% 84 per cent and 95 per cent of Mfs's U S. Retail mutual fund assets ranked in the top half of their Morningstar categories based on 10, five and three year performance respectively.
Individual insurance sales grew 12% over prior year, with 27% growth and Canada, and 12% growth and Asia on a constant currency basis total insurance sales were down 6% compared to last year as our group business and Canada continued to see fewer large cases coming to the market during the <unk>.
In April we announced our intention to acquire pinnacle care, a leading U S health care and navigation and medical intelligence provider, which will become part of our U S stop loss and health business and this acquisition, which we expect to close later this year changes stop loss and help from a business that reimburses.
After an employee's care has occurred to one that gets us involved through pinnacle care right from initial diagnosis. This should lead to better health outcomes and better cost management, including lower stop loss claims for our clients.
These new capabilities are exactly in line with our purpose of helping clients live healthier lives.
Turning to slide five we continue on the journey of accelerating everything digital driven by our purpose and powered with an unrelenting focus on clients and this quarter was no exception and Canada. Our digital coach Ella continues to connect with our clients, helping them save for their future and ensure protection for their loved ones.
We're making it easier for clients to do business with us holding over 61000 virtual advisor client calls and the first quarter, a big jump compared to the 5000 and we held in Q1 of last year. This quarter, we used E signatures and Canada for over 85000 and transactions and that compares to 14000.
And the same period last year.
In April we launched stitch in select U S States stitch is and innovative supplemental health offering.
Labeling members to buy coverage directly from Sun life online through their Worksite benefits program at any time. This is an important offering as it allows members to take their insurance with them, even if they leave the company and will also protect part time and gig workers, who typically are not eligible for employee benefits.
We've also made great progress and Asia, where 66% of new insurance applications were submitted via an electronic application and increase of 14 percentage points over the fourth quarter of 2020.
We also introduced new digital personal accident and cancer products and collaboration with one of our Bancassurance partners in Vietnam to help our clients when they need us the most.
These digital products offer a seamless experience to purchase coverage entirely online and receive policies in just minutes via straight through processing.
And the Philippines, we launched a premier digital on demand wellness platform to help clients focus on their health platform, which is called go well studio offers a variety of features including virtual exercise programs guided meditation and health care awareness content.
So sun life is off to a strong start in 2020, one with double digit earnings growth, a strong Roe and a strong balance sheet with ample flexibility.
As we look ahead, we are well positioned to benefit from and expanding U S economy, the growth and Asia, driven by its compelling demographics and strong momentum and Sun life, Canada asset manage them and as you know is a large part of our business and we're well positioned and M. F. S. S. L C management and our.
Other managers as clients seek positive alpha in this lower return world and our insurance businesses are well positioned to do more for clients, whose awareness of and need for protection has been reinforced by this pandemic.
I'm now pleased to introduce our new CFO Manjit Singh, who joined Sun life and March Manjit brings a wealth of knowledge, including 20 years of experience at one of Canada's largest financial institutions. We're thrilled to have manage it on board and he'll take us through the first quarter results. Kevin strain is also here today and will be available with.
US for the Q&A portion of our call. This morning, and now I will turn things over to imagine right. Good morning, and thank you Dean I'm thrilled to join the Sun life team. This is a global organization with a rich history and a proven track record and strong performance.
I've spent the first five weeks my time at Sun life meeting with colleagues across all of our businesses and support functions.
It's clear to me that Sun life is a special culture.
A culture, where employees advisers and partners work together to deliver for all of our stakeholders, especially our clients and.
I look forward to contributing to Sun life future success.
Now, let's turn to slide seven for an update on our first quarter results.
Amidst the ongoing challenges from the global Pandemics Sun life delivered reported net income of 937 million, reflecting growth and underlying net income and a favorable impact from equity markets and rising interest rates.
This was partially offset by fair value adjustments and MFS share based awards, reflecting strong earnings and AUM growth.
We also recorded a 57 million restructuring charge related to our workspace strategy, which will generate pre tax savings of approximately $20 million per year.
Underlying net income per the quarter was $850 million and increase of 10% compared to the prior year driven by business growth as well as favorable morbidity and credit experience.
This was partially offset by lower investing activity gains compared to elevated gains and the first quarter last year as well as at $31 million unfavorable currency impact.
Underlying earnings per share for the quarter were $1 45, and increase of 11% from the prior year with underlying ROE of 15, 3%.
Assets under management at the end of the first quarter exceeded one three trillion dollars, reflecting market appreciation during the quarter net inflows at SLC management and the acquisition of Crescent capital.
Book value per share declined modestly from last quarter, reflecting declines and F. S unrealized gains and foreign currency translation from a stronger Canadian dollar and the impact of the Crescent acquisition offset by growth and reported net income.
Our capital continues to be strong with leichhardt ratios of 141% at SLS and 124% at S. L. A.
The decline in U S. A life ratio from the prior quarter relates reflects the crest and Coppola acquisition funding for the ACB bankers severance agreement arrangement redemption of subordinated debt and the impact of rising interest rates.
The funding of the ACB Bancassurance agreement and rising interest rates also impacted S. L as like cat ratio.
Our financial leverage at the end of the first quarter was 22, 7%.
And this remains below our long term target of 25 per cent and coupled with a $2 3 billion of excess cash at the holding company provides us with significant financial flexibility.
Slide eight outlines the performance for each of the business groups.
Canada has reported net income of $405 million increased $447 million over the prior year predominantly driven by favorable equity markets.
A rising interest rates were also favorable this was largely offset by tighter credit spreads.
Underlying net income increased by $29 million, driven by business growth and favorable credit and mortality experience, partially offset by lower investing gains.
U S reported net income of $211 million increased 47 million compared to the prior year, primarily driven by lower act my charges and favorable market related impacts.
Underlying net income increased $10 million, reflecting favorable morbidity experience and stop loss and long term disability.
This was partially offset by lower investing gains lower earnings and surplus and unfavorable mortality experience.
Asset management reported net income of 230 million a decline of $9 million compared to the first quarter last year as fair value adjustments for MFS share based awards were largely offset by an increase and underlying net income.
MFS underlying net income of 290 $91 million was up $49 million driven by a AUM growth.
MFS ended the quarter with a pretax net operating profit margin of 39%.
And I'll see management's underlying income was in line with the prior year.
The contributions from infrared and Crescent were offset by timing of composition compensation expenses and lower real estate fund catch up fees.
As discussed at the Investor Day, and March SLC management has good fundamentals with significant amounts of capital that will be invested and become free generating.
And Asia reported net income of 198 million and increased by 98 million from the prior year as the business benefited from favorable market impacts.
Underlying net income increased $4 million, driven by a 24% growth and expected profit and new business gains offset by unfavorable mortality experience.
Corporate had a net loss of 107 million, a 37 million increase from the prior year, primarily due to the $57 million real estate restructuring charge.
The underlying net loss and corporate was 56 million a 12 million increase from the prior year.
The increase reflects higher spend and corporate initiatives and and increasing the value of share based incentive compensation, partially offset by a higher contribution from the U K business.
Slide nine out life outlines a sources of earnings.
Expected profit grew 10% driven by good results and asset management as well as business growth and higher fee based income and Canada and Asia.
Excluding the impact of currency and asset management expected profit grew 6% over the prior year.
Effective this quarter, we reflected and methodology changed to include new business income for the U S group benefits business and expected profit.
This is consistent with the treatment for the group benefits business and Canada going forward, we do not expect to see new business gains and our U S sources of earnings.
This change has been reflected for prior periods.
Total new business gains increased by $21 million over the prior year, reflecting pricing actions and the Canadian individual insurance business and higher sales and Asia.
Experience gains of $425 million were largely driven by market related impacts and rising interest rates and equity markets.
We also benefited from investing gains favorable morbidity and the U S and positive net credit experience.
This was partially offset by expense experience as well as unfavorable mortality experience and the U S and Asia.
Earnings and surplus declined $8 million year over year, reflecting the impact of lower yields.
Slide 10 outlines insurance and wealth sales for the first quarter.
Individual insurance sales were up 12% while group sales were down 24 per cent compared to the prior year.
The increase and individuals' insurance sales was driven by 27% increase in sales and Canada, primarily from strong par sales and.
And Asia, Vietnam posted strong sales growth driven by our new bancassurance partnerships and.
China and Malaysia also saw strong sales growth with the Philippines, and India, and Indonesia down and COVID-19 related Lockdowns.
Sales and the international hubs business were also impacted by the Lockdowns and travel restrictions.
The year over year decline and group sales was primarily attributable to fewer large case sales coming to market and the Canadian group benefits business.
U S group sales were relatively flat year over year as the higher sales and employee benefits were offset by lower stop loss sales.
Wealth sales, excluding asset management were down 3% from the prior year.
Well sales and Canada decreased 21%, primarily driven by a large routine case and group retirement solutions and Q1 of 2020.
Mutual fund sales and sales of guaranteed investment products both increased.
Asia wealth sales were up 48%, excluding the impact of foreign exchange driven by mutual fund sales in India, the pension business in Hong Kong and money market sales and the Philippines.
Asset managed gross flows of $58 2 billion were up 12% driven by higher flows at SLC management.
Sally of new business increased 10% compared to Q1 of 2020, reflecting strong sales and higher margin V N V products across both insurance and wealth.
Turning to slide 11, operating expenses were up 20% from the prior year 12 percentage points of the year over year increase was driven by fair value adjustments related to share based incentive compensation and MFS and Sun life, the run rate impact of newly acquired businesses and SLC management and the real estate restructuring charge, partially offset.
By favorable currency impacts.
Higher controllable expenses and contractual volumes contributed to the remaining eight percentage points of the year over year increase.
The asset management business accounted for just under two thirds of that growth, primarily driven by expenses related to strong AUM growth.
And the remaining increase of approximately 3% relates to business growth and our organic growth initiatives, including our continued investments in digital.
Overall this quarter's results highlight the strength of Sun life four pillar strategy. It was a good start to the year.
Remain focus on continuing to invest and our businesses to drive future growth, while maintaining expense discipline.
Now I'll hand, it back to you need to begin the Q&A portion of the call.
Yeah.
Thank you manager to help ensure that all of our participants have an opportunity to ask questions. This morning, I would ask me to limit yourselves to one or two questions and then re queue with any additional questions and we'll now ask Adam to poll the participants.
Thank you if you would like to ask a question at this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question press the pound key.
And I will pause for just one moment called the Q&A roster.
And your first question comes from line of John Aiken of Barclays. John Your line is open.
And given the current situation in India I know this is a reasonably early days relative to what's what's happening, but are you able to extrapolate any and any impact on our on the businesses that you have.
True.
Leo do you want to take that.
Yeah.
Good morning, John Thanks for the question.
As you mentioned.
The situation and it's very early days right now and the second wave in India and the situation is evolving.
And I quickly at this point and time I'd have to say our focus is really on the safety of our employees partners and.
And clients.
And we haven't I think it's too early to tell what the medium term impact is going to be Oh, what's currently happening over there.
You know what what I would say is that we are benefiting.
Fitting from the capabilities, we have in India and in terms of digitally enabling our employees as well as digitally enabling advisers and two operations are fully functional and we're continuing to see sales flow through but I think it's just too early and to have an indication on.
And whether there would be material impact.
And so thanks, Leo and from my second question.
Given the fact that.
You guys took a restructuring charge to rationalize your.
And real estate footprint does this have any implications for the real estate holdings that you have within that within your broader portfolio.
Steve why don't you take that.
Yeah. Thanks for the question Alex.
And on everyone's mind, what's the impact on commercial office space. They can see evaluations and until we get this question a lot I think that and we have real estate of course on our own balance sheet, and we and we need.
And I think portfolios and real estate for our third party clients.
And I think our answer is generally debt so haul thing.
We we actually are seeing and and many of our properties.
More of a return to the office and we might have expected. However, we're certainly going to see and some of them.
Like with our Celsis Sun life that people are kind of reconsider office space, We really think it's going to be property and city specific.
So there won't be certain cities like and Asia, Tokyo for instance, where we don't think there'll be any impact at all and somewhat some cities like New York May have a bigger impact.
And do you like Boston certain properties may be more impacted than others. So overall I think certainly we're going to see a decline in occupancy for some period across commercial office space broadly.
Impact will be very specific by property and.
And Citi overall I think.
These are well positioned we've got strong properties and good markets and so we're not we're not.
And to worry about the overall impact on our specific properties.
And you sort of color Steve.
And your next question comes from the lineup and Muni.
And Scotiabank.
Hi, good morning.
It's been a year since COVID-19 hit basically I'm wondering.
If you have a better sense of the ultimate impact of the pending.
On our insurance experience specifically to go across your segments. You know, we're seeing morbidity move one way and mortality experience moving the other way, but I'm wondering one and a net basis as you look at the.
The entire enterprise on a net basis kind of what what is winning out and what do you think is the ultimate.
What is going to be the ultimate impact of COVID-19 on those insurance experience our risks.
And he it's dean Thanks for your question I'm going to ask Kevin Morrissey two two to answer that but I think I'll just start at the top of the house and say that one of the one of the reasons our earnings haven't been tremendously impacted by COVID-19 is this balanced and diversified business model where yes.
We have elevated claims on life insurance offset somewhat by reduced.
Reduced claims and morbidity area and certain areas of morbidity and offset by annuities and so that balanced diversified business model has really served us well, but I'll turn it over to Kevin to take it to the next step.
Thanks, Dean and thanks for that question, so starting with mortality.
And we really benefited from the geographic as well as product diversification.
So overall, we haven't seen.
Big impact that you would have noticed to our financial statements, where we had some gains and losses over over the quarters.
And the morbidity side, largely we and take them.
And he says you will witness, especially last year with a decrease in utilization.
However that is normalizing across many of the products and I would say that.
We'll have to see what happens longer term in terms of.
Long term disability and potential longer term impacts related to the COVID-19 disease as well on the lot side.
A bit of an uptick.
Yeah.
Lapsed losses since the start of the pandemic, what we've seen as policyholders and seem to be holding onto their.
Policies longer which is a good thing from the clients and and is a testament to the value to clients and this and this.
Jones and Tom during the pandemic, so we have seen somewhat.
Losses from losses, but at this point, it's not clear.
And when we book.
And the policyholder behavior revert back and forth.
Normal so.
And all.
We've had.
Hedge quite good success in terms of Orange and diversified business. So we haven't had book.
And you will witness longer term nowhere, we're continuing to monitor the trends and the longer term impact.
And you will have also noted we have not made any updates to our longer term actuarial assumptions and I think it's just really too early at this point to make that call, but we are continuing to monitor that closely.
Thanks for that and then just as a follow up I mean, that's what I'm trying to get at whether.
What you've seen so far.
And is indicative of what we're likely to see once that's all wraps up or is there something to be.
I'm conscious of potential unanswered questions or risks in terms of how.
And this issue plays out and.
Towards the tail end of COVID-19 and and maybe beyond.
Tough question to answer and Danielle I would say there are certainly a lot of unknowns still ahead of US we've got room for optimism.
But with the new vary from the J D.
And it does still raised a lot of questions both volume.
<unk> side, and then more broadly on the economic side, So I'd say that.
We don't know at this point.
I think that what we do know is we've got a really good risk profile and position, we're comfortable with that and how we manage our risk and our overall profile and.
So you know.
We are optimistic about the future and will help you.
Wait to see how that will unfold and ultimately.
Thank you.
And your next question comes from a line of David motivated and with Evercore.
Hi, good morning.
I guess I just had a question in Asia.
And I'm wondering if you could help me maybe think about just looking at expected profit on in force.
How much of that is driven by wealth related sort of fee related earnings versus insurance earnings.
And I and I also I guess, maybe if you could just comment and Leo just great to see the wealth sales up 48% year over year.
On a constant currency basis I'm also wondering maybe if you could talk about net flows.
And after thinking about withdrawals.
Okay.
Yeah. Thanks, David.
It's Neil here so on the first part of your question and.
And the source of.
The gains.
And.
Net profit.
So we have we are seeing some some good improvement overtime.
It's primarily driven by business growth on the insurance side and and higher fee based income on both the life and the wealth side of our business.
And I can't give you precise numbers, but the core of our.
Our business in Asia.
Still remains.
Primarily insurance driven see about 80% insurance driven.
Roughly speaking.
With the 20% being more pure wealth type of business now and what is important to note is that a good chunk of our core insurance products are being used at savings vehicles.
So.
While their insurance chassis and.
Some of that would be purchased by our clients for our force savings purposes.
So that's on the on your first question on your second question around the net flows across our across our business.
And.
I don't have the exact numbers off the top of my head David will have to come back to you on this one.
Yeah.
Okay. That's helpful. And then maybe if I could just switch <unk> switch gears and and add one in for Dan on the U S business.
Yeah, good to see a continued year over year growth and the employee benefits in force premium again this quarter.
I'm wondering if you could just talk.
Talk about and maybe quantify what you're seeing in underlying covered lives.
And if that's still a headwind.
From an exposure standpoint, and how we should be thinking about that over the course of the rest of the year. You know if if if employment doesn't Peru would you expect to see a meaningful increase.
Just from exposure growth and covered lives.
Hey, good morning, David It's Dan. Thank you for the question.
Really seeing a pretty rapid recovery and employment in the U S.
So I think we had mentioned and the last call that we estimated about a 3% reduction and covered lives at the at the bottom.
But that's largely come back as we look at our January 1st enrollment.
It's a little hard to parse out all the different factors in terms of number of employees versus number of people who enroll.
But generally enrollment was higher in January than it had been in the prior January so the economy and covered lives seems to be snapping back.
Rather quickly.
And really never went down that much and the first place.
Great. Thank you.
And your next question comes from the lineup and Gabriel.
And with National Bank financial.
Good.
Yeah.
The expenses at MFS, and you'll give a bit more like I mean, that's where there was some variation versus what I was expecting there. This quarter. If there's anything specific you can flag and then sticking to this group more cross border commentary here and he's.
Talked about the benefits utilization.
Outlook is that comment.
And more U S skewed we could see the employment are accelerating there, Canada, largely and locker, which might have a more lagged impact on benefit utilization I'm, just trying to get a sense for how long some of these morbidity gains can persist.
So dean Gabriel Thanks for your questions why don't we start with Mike on the expenses at MFS and then and then we go to to Dan on and and then Jacques on the group benefit morbidity trends.
Thanks Dean.
Hey, good morning, Gabriel it's Mike.
On expenses, you know theres, nothing nothing to call out and expenses.
The expenses that are up year over year year over year, those that are tied to profitability or asset based fees that we pay.
Distributors, if you look year over year non discretionary expenditures there relatively flat so there's nothing really to call out there.
And this hall and.
On the group benefits morbidity and the U S.
And very favorable experience in the first quarter and our stop loss business now some of that relates to just how prior periods are completing.
One comment that I would make within areas, we've noticed lower cancer diagnoses and our stop loss business and we do have a little bit of concern that dares delayed diagnosis because of people not seeking care throughout the pandemic, but overall stop loss.
<unk> continues to be quite favorable and our long term disability business, we had a favorable quarter as well for morbidity that was largely based on resolutions, which suggests that there are jobs for people to go back to.
Kind of consistent with the question and I have answered a moment ago.
Okay.
Overall, our morbidity was favorable and the first quarter.
Great.
Hum.
Yeah exactly I can go next there.
Yes sure.
Your question was specifically and benefit utilization, it's pretty well back to normal we did have as you know a favorable experience from quarter one 2020.
And that was driven in large part by the <unk>.
Second half of March closure.
But we're pretty well back to normal day morbidity issues in Canada this quarter.
And there's more to do with.
Disability business.
And one of the you might recall because I've talked about this before we're watching very closely and sedans as well as recoveries and.
And so that's our in line, what we're seeing and recoveries and this is in my view COVID-19 related.
And the lack of access to care.
Which means that it makes it longer for people to get back to work so.
And that's really what's the main driver of our morbidity experience this time around.
Alright.
And clarification Russell.
And in preparation.
And your next question comes from the line of Tom Mackinnon.
M O capital.
Yeah, Thanks, very much good morning.
A couple of things with respect goals.
Uh huh.
And our modestly.
Modestly negative.
And if I look at it compared to the fourth quarter.
And the improvement.
Yeah.
And the first quarter book.
And the lower than they were and the fourth quarter. So we got mix related and how thats going to Blue zone.
And then.
Hmm.
Hum.
And the court.
We used to talk about 30 to 35 million a quarter. So.
Why was it outside.
Something like Ford and go ahead.
And going forward.
And then and then finally and you have and.
Other expenses.
3 million and the quarter and I think that's related to kind of special projects.
Every company has special projects, so why aren't they just like part of your expected profit and what is the outlook for those things going forward. Thanks.
So Tom that those three questions, we'll start with Leo and then and divestment gains over to Randy and your question on expenses I think it was your third one.
We'll go to Kevin Morrissey, So Leo why don't you start.
Yes, good morning, Tom Thanks for the question on new business gain.
Touch it from.
From a few different factset.
If you look at.
The results in Q1.
We did have a lower new business gains year over year, which we're quite happy about you mentioned a shift in business mix that that is one factor that we're seeing but I'd call out a few others.
Did.
And see strong sales.
Across the region with double digit growth.
In four of our markets.
And that have good new business gains.
And I know that.
And it's lower quarter over quarter, but higher year over year.
There is a mix impact here in terms of the type of products that we are selling this quarter. So that explains the difference in terms of lower sales, but but similar quarter over quarter, new business gain and the other things that are happening is.
We are seeing some stronger sales as you know in Vietnam from our new bank partnerships and some of that is contributing to the result.
And then we've also seen improvements and our expense GAAP.
Driven by the.
And the work we've been doing on expense discipline managing.
Our expenses as well as improvements in our product designs and so all of those things.
Yes, it's the product mix, but its a number of management actions that we've been taking during the pandemic and even before that are really contributing to all of this investment and distribution and excellent improvements and all in all.
In our expense structure and Digitization of our business to improve client experience. All of these things are contributing to one two improvement and new business gains.
And then Randy you talked about investing gains and and I think part of the question was also the guidance around that and manage it we'll cover off that part of it but Randy over to you.
Okay. Good.
Tom. Thank you for the question. This is Randy So we had a strong activity gains in the quarter really driven by <unk>.
Strong sourcing and private fixed income.
So we are we were able to in source and attractive deals.
And that were negotiated and.
And.
And so that that's really what drove those activity gains and you know you do see lumpiness and that number quarter to quarter.
But but they were they were high quality games this quarter and.
And let me turn it over to mention in terms of guidance.
Yes, Sir.
Sorry, sorry.
And sorry, Tom did you have another follow up.
No I was just debt, where youre going to talk about the guidance with respect to them.
Yeah, Good morning management.
I agree with Randy's comment that these will bump around quarter to quarter, just given the market environment. The previous guide and we've sort of given your sort of 15 to 30 30 million pretax and we think we're over a cycle that's still an appropriate amount.
Okay, Great and then the last one on the other expense.
Yes, Tom this is Kevin and thanks for that question. So the minus $33 million. This quarter was on the high side. Yes, you asked about was that driven by special projects and the answer is really no. It really wasn't driven by special projects and though special projects are a component within that that lineup.
And the source of earnings.
You also asked about why why is it not and expected profit.
Wanted to highlight that we do have a special projects and we do have project costs that are included in the expected profit line not all of them, though and so the distinction that we make is really kind of a longer term nature of them saw some so if projects are constant and it'd be longer term more sustained but we do include <unk>.
Expected profit some of the shorter term projects life.
17, which are coming from this year and will be declining significantly going forward those are in the other expense.
And so the driver this quarter.
We have a lot it's tough to point to one thing frankly, because we do have it could be a dozen or more small things and we are all small and each business group and there's pluses and minuses, but one of the things I'll highlight this quarter is that yes.
And the accounting recognition by quarter can be can be different from and the anticipated whats interest paid and watchful and liabilities for Sun sourcing for example, premiums and commissions. This quarter. So there was a bit of a mismatch and timing on the premiums and commission side. So it did create some quarterly volatility, but that will even out.
We'll go to the course of the year and.
And I do also just wanted to remind you that the minus 15 million gallons and I referred to in the past is really a longer term average loans and you shouldn't expect should not expect to see an even quarterly trends and that will pump.
And down as we have seen over the last.
And while over the last four quarters and talk to the average has been minus seven and so it's actually been burned with that run rate, but it will be up and down quicker and quicker.
Okay. Thanks for that.
And your next question comes from the line of Paul Holden.
And I B C.
Thank you good morning, I'll just pass.
Got one question and I wanted to ask about.
Nice participation and the pension risk transfer business given the recent transaction with with GM, Canada. So.
Two questions on this front.
And is can you give us a better sense of risk appetite and this business and I, partly offset from the context.
Okay.
And that business was the first one.
Spread around the risk.
Are there more is there more willingness to do that bringing and multiple partners and.
And then two I mean, how do you kind of view that market opportunity over the next.
12, 24 months, we are hearing anecdotal evidence that there should be.
Increased amount of activity and.
The near term so I'll leave it there with those two questions.
Okay.
And do you want me to start with yes.
Yeah, Hey, Chuck.
Good day and.
Thank you Paul for your question.
Maybe I'll start by just to make sure there's no confusion and I'll start by pointing out that wildly.
Press release from Japan.
Hey miles and the first quarter. This is really a deal that we did in Q3 last year Paul.
And.
There's a timing in terms of sometimes where the.
And when we put the thing on the book and when we and make the announcements. So so that's the first point in terms of the.
And the risk appetite and the market opportunity and thank you remember we.
We view defined benefit solution very much I was one of our growth engine and Canada.
We think this is a very healthy market.
There are two other similar markets and the world that's the U S and the U K and they're much more mature and develop.
We think that's a market that has a lot of runway ahead of it.
There are situations where clients will spread.
Okay and.
G M. One is useful and we got the bulk of it.
And they did that they did give some slice whether it's other insurers.
We've been the leader and that business falls for physically eight or nine years now and.
And we have.
And my view and probably biased, but the strongest strongest team and the industry on this.
And one of the things that does for us is.
We tend to basically have a have a look at pretty well every deal that comes from market.
And that allows us to be selective on which ones were more interested in and which ones we might be life.
So overall this is a very much remains one of our growth engine, we think and.
The market is going to continue to grow.
And many many defined benefit plans are on what we call Derisking glide path and.
And the last step is you know on a path like this.
Amortization.
So we think we're very well positioned and that's a very a very healthy market as possible.
Okay. So just so I understand what that GM deal in particular.
The auction you might have taken 100% of it but it was really it was gms auction to share the risk among a number of players.
We go through a whole process and these things are analyzing.
And how we want to approach it and in some cases.
And we might be happy ourselves not to take the whole deal and in other cases, we will want to take the whole deal. So I won't speak you know deal to deal, but as I said earlier and.
We have the ability, which is nice to be quite selective.
And these deals and we will continue to exercise that.
Okay. Thank you.
And your next question comes from line of Doug Young of days, Jordan <unk> capital markets.
Good morning.
And for for Dan and I, Yes.
And we saw I expected profit, Dan and the U S, 8% and I would hazard a guess that is probably related to the adjustments made for the in force, but what I wanted to understand was there and impact at all from your outlook on the group business and.
And with that can you talk a little bit more about any competitive threats or trends that youre seeing and the group business you mentioned that last quarter, just hoping to get an update.
Yes, Thanks, Doug.
Primary drivers for the change and expected profit as you noted we're at the lower interest rates and its impact and the <unk> business.
And the group business, we included some impacts from COVID-19.
Which at least temporarily offset gains from business growth and there is also an impact from foreign exchange, which has changed pretty significantly year over year.
As for the whether or not that reflects increased competitiveness or different conditions overall, not really the COVID-19 impacts, obviously or something affecting all group carriers, particularly and the life mortality.
And that should start to wane over time, obviously, we hope that will improve.
Soon so that's more of a temporary impact.
Overall in terms of competition and of course, it remains a very competitive market.
But we don't see any substantial changes and the competitive environment year over year.
And so you're building in a weaker group results from and expected profit perspective, because of your outlook for higher mortality experience and the group business over the next year is that let's say, it's safe to assume.
That's one of the drivers, especially during the early part of the year with the kind of mortality we've been seeing so we did build some of that and.
But the other factors are important as well.
That's fair and then maybe for Steve SLC underlying earnings were down 8% definitely below what we were looking for I just and.
And obviously below maybe the guidance or that debt.
And what we talked about and maybe at the Investor Day, obviously looking out, but but what I'm. Just wondering is there anything unusual and these results that kind of weighed on it this quarter stoping and get a little more color.
Yeah, Thanks, Doug and I'm glad you asked the question as Rick mentioned, we did have some kind of term one off or timing of expenses and the quarter. The biggest related to some appreciation and long term and incentive units and talk readout that we expense in Q1 and hadn't accrued for throughout 2000.
2020, we have some other charges related to some retirements and some other things related to the carbon sanction and all of those things hit in Q1, and it was a quarter. When we didn't have kind of and offset where we had some kind of onetime revenues as we saw in the fourth quarter.
I would say that our underlying earnings within our core earnings and the quarter right in line with our expectations and very consistent with the guidance that we gave during investor day.
And maybe I can take the opportunity just to make a few key points that may be useful as you track our per.
Progress going forward and and the persons debt. This is a pretty stable business, because our and is stable and that means that kind of be the basic core earnings driven by management fees are stable and they have been rising.
And it's grown.
On a quarterly basis, you will see some fluctuations from time to time and the fourth quarter of last year.
We're above that kind of core earnings right, because we had some catch up fees hit and the quarter. Some performance fees and those helped the bottom line. This quarter as I mentioned, we had some one off expenses, but the underlying kind of core earnings rates should continue to be stable and rising and as I said, the first quarter was definitely on that basis and mine.
And our guidance and our expectations, but that leads to my second point, which is I think one of the best ways to track the health of this business over time is by tracking our inflows.
Our ability to attract new investors to our platform and and this quarter is as you see and the numbers the and posted very strong.
And on teens per slide we noted that fee eligible and flows were $8 6 billion and even if you deduct the $2 billion of outflows and that's almost 4%.
And so net close to almost 4% of volume in the quarter now those are going to be also lumpy lumpy quarter to quarter, but as long as we can continue to grab the core earnings power and cell C is going to continue to rise and then the only and the final point I'll make is that I think the breadth of loans flows is important and we've got a product platform across many different asset classes and.
And this was a good example, this quarter we.
At $8 six its made up of wins across the platform from fixed income closing costs and private credit racing and CMO range.
Our follow on offering.
One of our listed funds and the U K and and.
Infrastructure et cetera, So we feel like we're starting to you and with some pretty good momentum.
And sorry, Steve if I could just clarify the 11 million and is that what you're saying is core that's reasonable or are you, saying 11 million plus if you remove some of the unusual expenses like the retirement and incentive units that would be more what we should think and I'm, saying that or yes, I'm, sorry that the $11 million I think is kind of lower than we would expect because of those one.
And those expenses that I would would kind of say were unusually large this quarter.
And have you quantified those.
We haven't yet and I don't think we called those out and our specific results, but what I will I will say is this we we kind of and I think during Investor day gave a sense of what we thought our core underlying earnings range does today. This quarter was consistent with that and it's also consistent with the longer term guidance that week.
Okay. Thank you.
And your next question comes from the line of Nigel D'souza of Veritas investment research.
Thank you good morning, I had a question for you on net interest rate sensitivity and when I look at.
And your table on interest rate sensitivity.
Drill down to the OCI component.
And I noticed that the impact to OCI from a 50 basis point parallel shift is still about 250 million this quarter versus last quarter. So it hasnt changed and I understand that you round it up to the ore down to the nearly $50 million, but maybe.
Maybe could you speak to what's helping you.
Minimize the interest rate sensitivity or the impact of interest rate shifts to like cat and how you've managed to mitigate that risk.
Nigel It's dean Thanks for that question and were going to ask Kevin Morrissey to take it.
Yes, thanks for that question Nigel So in terms of our my cat our sensitivity you would would've noticed that the sensitivity did come down this quarter and that's a that's a bit of a function of the interest rate environment, so without going into too much detail because there was quite a bit of complexity and to all the moving pieces.
And the numerator and the denominator, but the size of the the shots I will note do go up and down with the different changes and economic environment and so what we've observed is and the current environment, which is higher interest rates generally and especially across North America, we've seen our sensitivity come down on both the up and the.
Down shots and I think that that's a good profile and I think it's also a bit of a natural profile two and.
And.
And it becomes less stressed we're seeing kind of less and less movement in and less counters.
And that kind of cyclicality and the moves.
As we're moving out of this trust and interest rate environment.
That's really helpful and if I could just finish off with a broader question on.
Earnings on surplus and we've seen a pretty sizable increase in yields recently and the first quarter and I know it takes a while for that to.
Flow through to invested assets and invested asset returns, but do you have a sense of when.
Underlying net income could start benefiting through higher earnings and surplus if yields stay where they are or continue to move higher.
I can take I can do is Kevin strain and I can take that one you were still expecting the earnings on surplus Dibley, roughly 100 million Thats kind of what we've talked about in the past and.
And you can kind of expect it to be in that range, we will get a benefit longer term of the rising interest rate, but we're also losing some FX gains and so you get kind of some pluses and minuses and so we're kind of focusing on.
The day that net number there the $100 million.
Okay. That's helpful. Thank you.
And your next question.
And Humphrey Lee with Dowling and partners.
Good morning, and Frank have within and between my questions.
First question is about net flows and MFS.
You had very strong gross sales and I think it might be one of the that's the strongest.
And mutual funds.
But redemptions kind of spiked up and in the quarter. I was just wondering do you have any color that you can share in terms of and what you saw in mutual fund net flows.
Hey, good morning, Humphrey its Mike.
Yeah, I mean, clearly had strong growth sales in the quarter I mean, either to two parts of the business, where we saw higher redemptions. The first would be where we were not I guess, which was not surprising was the institutional business. That's primarily today and equity book of business and we see when markets are at all time highs you see de risking and rebalancing back.
And to fixed income during those periods of time, which is the converse of what we saw a year ago, where we saw better flows and that business. So that was not surprising year over year and our non U S retail business or U S. Retail business continues to generate strong growth and strong net on the non U S. Retail, we did see higher redemptions and the quarter driven by I think a couple of factors one is.
As we've seen.
So the market, particularly in Europe move more of a thematic product. So as you see things like technology and many of the other themes that are playing out in the marketplace. We do see investors chasing some of those trends within that channel. The second to call out would be a year ago, our best selling product was the hedged equity per.
Product and so it's a.
Through cycle, that's going to produce a return relative to cash.
Cared a lot about that a year ago, when they were worried about downside and investors today, clearly aren't focusing on downside and so we've seen net flows go from positive and that particular product to negative and so those would be the things that I'd call up from a net perspective, but you know again last year was an outsized year for us relative to the industry driving really strong net when the industry continue.
And to struggle and active and I think the way that we look at it as a relatively flat quarter when money continues to move and chase performance.
Relatively pleased the thing that we control as growth slows and we continue to see strong growth.
Got it. Thank you my second question is related to impulse management I think in the past you've talked about like the business and you you focus on optimizing it and drive better cash flow and value all of it but given the increased interest in risk solutions, especially in the U S and <unk>.
<unk> seems to be getting better.
Has your thinking related to enforce management change.
Yeah, Hi, Humphrey its dean and thank you for that question.
Think the.
You're right to note the interest in these businesses, but I would say that that's not new we've seen lots of interest in closed block, especially closed block insurance businesses and the United States over the past number of years and my guess is as you look ahead youll continue to see lots of interest and those businesses, particularly.
Really as more capital moves from public to private and so I think we've been consistent on this we we've been focusing on improving the execution and the performance of the enforce management business. We've made great progress great progress on expenses on on capital on Tac Sun.
On.
Dealing with some of the issues, including Stranger owned life insurance, where we've made great progress sorting out some of those issues and we still see some theres some opportunity there left yet.
But clearly you know it's not a it's not a growing business.
For us and that's something that we'll think about as we go ahead like we do with all of our businesses. We we think about where they fit and the overall four pillar strategy and you've seen us you've seen us add subtract change that mix over time so.
So we think about that.
For all of our businesses.
Got it thank you.
We have no further questions at this time and I will turn things to Mr. Linton for closing remarks.
Thank you Adam I would like to thank all of our participants today and if there are any additional questions. We will be available after the call.
And you wish to listen to the rebroadcast 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.
Yeah.
Okay.
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