Q1 2021 Sun Life Financial Inc Earnings Call
Hello.
Okay.
Good morning, Ladies and gentlemen, my name is Adam and I'll be your conference operator today.
At this time I would like to welcome everyone to the Sun Life Financial Q1 2021 line.
Actual results conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there will be a question and answer session.
The host of the call is John <unk>.
Vice President head of Investor Relations and capital markets. Please go ahead Mr. Burton.
Thank you Adam and good morning, everyone.
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 on.
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.
As noted on the slides forward looking statements may be rendered inaccurate by subsequent events.
And with that I'll, now turn things over to Dean.
Thanks, <unk> and good morning, everyone. Let me start by saying, we're thinking about our friends colleagues clients and their families in 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.
<unk> 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 while we're 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 want 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 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 in partnership with Daniel's group in the city of Toronto. These 34 apartments will be leased at roughly half the going market rents.
Through our 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 in new sustainable investments over the next five years across our general account and third party investments and that's in addition to the $60 billion of existing sustainable investments.
And starting this year 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 in asset management gross flows were up 10% driven by strong gross 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 in 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 in Canada, and 12% growth in Asia on a constant currency basis.
Insurance sales were down 6% compared to last year as our group business in Canada continued to see fewer large cases coming to the market during the pandemic.
In April we announced our intention to acquire Pinnacle care, a leading U S health care navigation and medical intelligence provider, which will become part of our U S stop loss and health business. This acquisition, which we expect to close later this year changes stop loss from help from a business that reimburses employers after in a.
Please care has occurred to one that gets us involved through clinical 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 empowered with an unrelenting focus on clients and this quarter was no exception in 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 in the first quarter, a big jump compared to the 5000, we held in Q1 of last year. This quarter, we used E signatures in Canada for over 85000 transactions and that compares to 14000.
In the same period last year.
In April we launched stitch in select U S States stitch is an innovative supplemental health offering on.
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 in Asia, where 66% of new insurance applications were submitted via an electronic application on increase of 14 percentage points over the fourth quarter of 2020.
We also introduced new digital personal accident and cancer products in 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.
In 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 2021 with double digit earnings growth a strong on ROE and a strong balance sheet with ample flexibility.
As we look ahead, we are well positioned to benefit from an expanding U S economy the growth in Asia, driven by its compelling demographics and strong momentum in Sun life, Canada asset management. As you know is a large part of our business and we're well positioned in MFS and SLC management and on.
Other managers as clients seek positive alpha in this lower return world in 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 in March manage it 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 Deane I'm thrilled to join the Sun life team. This is a global organization with a rich history and a proven track record of strong performance on.
I 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.
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 in underlying net income and a favorable impact from equity markets and rising interest rates.
This was partially offset by fair value adjustments on 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 pretax savings of approximately $20 million per year.
Underlying net income for the quarter was $850 million, an 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 in the first quarter last year as well as at $31 million unfavorable currency impact.
Underlying earnings per share for the quarter were $1 45, an 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 in F. S unrealized gains foreign currency translation from a stronger Canadian dollar and the impact on the Crescent acquisition offset by growth in 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 life ratio from the prior quarter relates reflects the Crescent capital 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 SLA is like cat ratio.
Our financial leverage at the end of the first quarter was 22, 7%.
This remains below our long term target of 25% 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 akamai charges and favorable market related impacts.
Underlying net income increased $10 million, reflecting favorable morbidity experience in stop loss and long term disability.
This was partially offset by lower investing gains lower earnings on surplus on 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 in underlying net income.
MFS underlying net income of 290 $91 million was up $49 million driven by AUM growth.
MFS ended the quarter with a pretax net operating profit margin of 39%.
S. L C managements 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 in March SLC management has good fundamentals with significant amounts of capital that will be invested in become fee generating.
In Asia reported net income of $198 million 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 in expected profit on 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 underlying net loss in corporate was 56 million a 12 million increase from the prior year the.
The increase reflects higher spend on corporate initiatives and an increase in 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.
Expected profit grew 10% driven by good results in asset management, as well as business growth and higher fee based income in Canada and Asia.
Excluding the impact of currency and asset management expects net profit grew 6% over the prior year.
Effective this quarter, we reflected a methodology change 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 in Canada.
Going forward, we do not expect to see new business gains in 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 on the Canadian individual insurance business and higher sales in Asia.
Experience gains of $425 million were largely driven by market related impacts on rising interest rates and equity markets.
We also benefited from investing gains favorable morbidity in the U S and positive net credit experience.
This was partially offset by expense experience as well as unfavorable mortality experience in the U S and Asia.
Earnings on 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 in individual insurance sales was driven by 27% increase in sales in Canada, primarily from strong car sales and.
In Asia, Vietnam posted strong sales growth driven by our new bancassurance partnerships.
Yeah, China in Malaysia also saw strong sales growth with the Philippines, and India, Indonesia down on COVID-19 related Lockdowns.
Sales in the international hubs business were also impacted by the Lockdowns and travel restrictions.
The year over year decline in 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 on employee benefits were offset by lower stop loss sales.
Wealth sales, excluding asset management were down 3% from the prior year.
Well sales in Canada decreased 21%, primarily driven by a large retain case in group retirement solutions in Q1 of 2020.
Mutual fund sales in 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 in the Philippines.
Asset managed gross flows of $58 2 billion were up 12% driven by higher flows at SLC management.
<unk> of new business increased 10% compared to Q1 of 2020, reflecting strong sales in higher margin bnb 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 at MFS and Sun life. The run rate impact of newly acquired businesses in SLC management, and the real estate restructuring charge, partially offset.
By favorable currency impacts.
Higher controllable expenses in 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 are on 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.
<unk> focus on continuing to invest in 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.
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 I will 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.
I will pause for just one moment compile the Q&A roster.
And your first question comes from the line of John Aiken of Barclays. John Your line is open.
Given the current situation in India I know this is a reasonably early days relative to what's on what's happening, but are you able to extrapolate any any impact on on the businesses that you have in the region.
Leo do you want to take that.
Yeah.
Good morning, John Thanks for the question.
As you mentioned the.
The situation is very early days right now on the second wave in in India and the situation is evolving.
Quickly.
At this point in 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 of what's currently happening over there.
You know what what I would say is that.
We are benefiting from the capabilities, we have in India 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 to have an.
And on on whether there will be material impact.
Understood. Thanks, Lew and from my second question.
Given the fact that.
You guys took a restructuring charge to rationalize your.
The 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.
Okay. Thanks for the question Alex.
On everyone's mind whats the impact on commercial office space, They can see valuations.
Until we get this question a lot I think that and we have real estate of course on our own balance sheet on big portfolios real estate car on third party clients I think our answer is generally that it's still a halting.
We we actually are seeing in many of our properties.
More of a return to the office that we might have expected. However, we're certainly going to see on Sunday.
Like with our sales of sunlight 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 in Asia, Tokyo for instance, where we don't think there'll be any impact at all.
From cities like New York May have a bigger impact also on it sounded 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.
On Citi overall I think.
These are well positioned we've got strong properties in good markets and so we're not on that.
Too worried about the overall impact on our specific property sales.
Thanks for the color Steve.
And your next question comes from the line of gross.
<unk> Scotia Bank.
Hi, good morning, So 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 pandemic on our insurance experience specifically to go across your segments. You know, we're seeing morbidity move one way mortality experience moving the other way, but I'm wondering on a net basis as you look at.
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 risks.
Many 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 you are.
Yes, we have elevated claims on life insurance offset somewhat by.
Reduced claims and morbidity area in 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.
Thank you.
Thanks for that question, so starting with mortality.
And we've really benefited from the geographic as well as product diversification.
So overall, we haven't seen.
Big impact on you would've noticed to our financial statements, where we had some gains and losses on her over the quarters on.
On the morbidity side.
Largely we take.
<unk>.
<unk> says you will witness, especially last year with a decrease in utilization however.
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.
Yes.
Lapsed losses since the start of the pandemic, what we've seen as policyholders seem to be holding on to their pulse.
Policies longer which is a good thing from the clients on and is a testament to the value to clients.
On this challenging time during the pandemic so are we.
Have seen somewhat higher.
Higher losses from losses, but at this point, it's not clear on what will happen.
The policyholder behavior will revert back to normal.
Gamble so.
All in all I'd say.
We've had.
We've had quite good success in terms of on balance from diversified business. So we haven't heard from Boston.
From a witness longer term.
We're continuing to monitor the trends on the longer term impacts on <unk>.
As also noted we have not moving.
So 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 day, just as a follow up I mean, that's what I'm trying to get on whether.
What you've seen so far.
It 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 the.
This issue plays out.
Towards the tail end of COVID-19 and maybe beyond.
Tough questions ahead from Danielle I would say there are certainly a lot of unknowns still ahead of US we've got room for optimism as the vaccines are being rolled out but with the new variance of the disease.
There's still a lot of questions both.
On insurance side, and then more broadly on the economic side. So I would say that you know.
We don't know at this point.
Think that what we do know is we've got a really good risk profile position, we're comfortable with that and how we manage our risks and our overall profile.
And so we are optimistic about the future on behalf.
Wait to see how that will unfold ultimately.
Thank you.
And your next question comes from the line of David motivated with Evercore.
Yeah.
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 also I guess, maybe if you could just comment on 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.
After thinking about withdrawals.
Okay.
Yeah. Thanks, David.
It's Neil here so on the first part of your question and.
The source of.
The gains.
<unk> expense.
Net profit.
So we have we are seeing some some good improvement over time.
It's primarily driven by business growth on the insurance side and higher fee based income on both the life and the wealth side of our business.
I can't give you precise numbers, but the core of our business in Asia still.
Still remains.
Primarily insurance driven see about 80% insurance driven.
Roughly speaking.
With the 20% being more pure wealth type of business now on 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.
Some of that would be purchased by our clients for a forced savings purposes.
So that's on on your first question on your second question around net flows across our across our business.
On.
I don't have those exact numbers.
Top on my head David will have to come back to you on this one.
Okay.
Okay. That's helpful. And then maybe if I could just switch on switch gears and add more on in for Dan on the U S business.
Yeah, good to see a continued year over year growth in 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.
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 improve would you expect to see a meaningful increase.
Just from exposure growth in covered lives.
Hey, good morning, David It's Dan. Thank you for the question.
We're really seeing a pretty rapid recovery in employment in the U S.
So I think we had mentioned in the last call that we estimated about a 3% reduction in covered lives at the at the bottom.
But that's largely come back as we look at our January 1st enrollment.
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 in covered lives seems to be snapping back.
Quickly.
Really never went down that much in the first place.
Okay.
Great. Thank you.
Yeah.
Yeah.
And your next question comes from the line of Gabriel.
<unk> with National Bank financial.
Hi, good morning.
The expenses at MFS, if you could give a bit more I mean, that's where there is some variation versus what I was expecting there. This quarter. If there's anything specific you can flag them sticking to this group more cross border commentary here and you talked about the benefits utilization.
Outlook is that comment more.
More U S skewed, we could see the employment the accelerating there, Canada, largely marker, 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 then Jack on the group benefit morbidity trends.
Thanks, Dave.
Hey, good morning, Gabriel it's Mike.
On expenses, you know, there's nothing nothing to call out on expenses you know the expenses that are up year over year year over year, those that are tied to profitability or asset based fees that we pay our distributors.
Distributors, if you look year over year on discretionary expenditures they are relatively flat. So there's nothing really to call out there.
In this call.
On the group benefits morbidity in the U S.
So on a very favorable experience in the first quarter in 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 in our stop loss business. So we do have a little bit of concern that dares delayed diagnosis because of people not seeking share throughout the pandemic, but overall stop loss.
It continues to be quite favorable in 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.
Consistent with the question I answered a moment ago.
Okay. So overall, our morbidity was favorable in the first quarter.
Great.
Goodbye.
Jack I can go next season.
Yes sure.
Your question was specifically on benefit utilization on it.
Pretty well back to normal.
We did have as you know a favorable experience from quarter one 2020.
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.
There's more to do with.
Disability business.
One of the you might recall because I've talked about this before we're watching very closely and sedans as well as recoveries.
So that's our in line what we're seeing in recoveries and this is in my view COVID-19 related.
Is it a lack of access to care.
Which means that it makes it longer for people to get back to work. So that's really what's the main driver of our morbidity experience this time around.
Alright.
Interest and clarification.
Panama ablation.
And your next question comes from the line of Tom Mackinnon BMO capital.
Yeah, Thanks, very much good morning.
A couple of things with respect goals or if I look at one park with new business.
Modestly negative.
If I look at it compared to the fourth quarter, a big improvement.
On the.
The first quarter, but were actually lower than they were on the fourth quarter. So we got mix related and how thats going to Blue zone.
Hum.
Hum.
74 and bring it on.
Talk about 30 to 35 normal quarter so.
Why was it outside or are we still looking.
Something like 45 going forward.
And then and then finally, we will have.
On other expense had a $33 million in 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 on the investment 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.
Me 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 we did.
See strong sales.
Across the region with double digit growth.
In four of our market on.
That have good new business gains.
And I know that.
It is 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 the other things that are happening is.
We are seeing some stronger sales as well.
When you get now from our new <unk> partnership and some of that is contributing to the result.
And then we've also seen improvements in our expense GAAP.
Driven by.
The work we've been doing on 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 excellent improvement in our in our.
In our expense structure digitization of our business to improve client experience. All of these things are contributing to improvement in new business gain.
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.
Strong sourcing and private fixed income.
So we are we were able to in source some attractive deals.
That were negotiated.
And.
And so that that's really what drove those activity gains and you know you do see lumpiness in that number quarter to quarter.
But but they were they were high quality gains this quarter let.
Let me turn it over to mention in terms of guidance.
Yes, Sir.
Sorry.
Tom did you have another follow up no I was just what are you going to talk about the guidance with respect to them.
Yes, good morning, its management.
Agree with Randy's comments that these will bump around quarter to quarter, just given the market environment. The previous guidance, 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 net.
Okay.
Yes, Tom this is Kevin 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 at the answer is really no. It really wasn't driven by special projects or special projects are a component within that that line of the source of earnings.
You also asked about why why is it not an expected profit on I wanted to highlight that we do have a special projects and we do have project costs.
Included in the expected profit line not all of them do and so the distinction that we make is really kind of a longer term nature of them saw some so if projects where costs are going to be longer term more sustained but we do include gouge them on expected profit some of the shorter term projects like <unk> 17, which.
Or kind of taking this year on one will be declining significantly going forward. Those are on the other expense line. So the driver this quarter.
We have a lot to point to one thing frankly, because we do have it could be a dozen or more small thing from me all small.
Each business group, and there's pluses and minuses, but one of the things I'll highlight this quarter is that.
The accounting recognition by quarter can be can be different from than we anticipated.
What's interest paid any actual liabilities for Sun sourcing for example, premiums and commissions. This quarter. So there was a bit of a mismatch in timing on the premiums on commission side. So it did create some quarterly volatility, but that will even out over the course of the year.
And I do also just wanted to remind you that from my.
15 million guidance that I referred to in the past is really a longer term average and you should expect should not expect to see an even quarterly trends.
<unk> been down as we have seen over the last on the.
Little while over the last four quarters on top of the average has been minus seven so it's actually been per member that run rate, but it will be up and down quarter to quarter.
Okay. Thanks for that.
And your next question comes from the line of Paul Holden.
I B C.
Thank you good morning, I'll just ask one question I wanted to ask about.
On my participation in the pension risk transfer business given the recent transaction with with GM, Canada.
Two questions on this front.
One is can you give us a better sense of risk.
Our risk appetite in this business and that partly offset from the context of.
On the GM business was the first one where you kind of spread around the risk. So are there more is there more willingness to do that bringing in multiple partners.
And then two I mean, how do you kind of view that market opportunity over the next 12.
24 months, we are hearing.
Total evidence that there should be an increased amount of activity.
In the near term.
I'll leave it there with those two questions.
Tim do you want me to start this Iraq Yep, Yep, Hey, Chuck.
Good day and thank you Paul for your question.
Maybe I'll start by just to make sure there's no confusion I'll start by pointing out that while the press.
Press release on GM.
Hey miles in the first quarter. This is really a deal that we did in Q3 last year Paul.
And.
So there's a timing in terms of sometimes where the.
When we put the thing on the book and when we make the announcement. So so that's the first point in terms of the.
The risk appetite in the market opportunity. Thank you remember we.
We view defined benefit solutions very much I was one of our growth engine in Canada.
We think this is a very healthy market.
Our two other similar markets on the World that's the U S on the U K and they're much more mature and develop.
So we think that's a market that has a lot of runway ahead of it.
There are situations, where clients will spread and he was saying and the GM on as you saw we got the bulk of it but they did they did give some slice whether it's other insurers.
We've been the leader in that business falls for physically eight or nine years now.
And my view on probably by us, but the strongest strongest team in the industry on this one of the things that does for US is we.
We tend to basically have a have a look at pretty well every deal that comes to market.
And that allows us to be selective on which ones were more interested in and on which ones we might be life.
So overall this is a very much remains one of our growth engine, we think.
Market is going to continue to grow.
Many many defined benefit plans are on what we call Derisking glide path.
Yeah on the last step as you know on on a pad like this is doing on.
Anyway. The organization. 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 with GM deal in particular.
You had the auction you might have taken a 100% of it but it was really it was gms auction to share the risk among a number of players yes.
Yeah, we can.
Go through a whole process and these things are analyzing.
You know, how how we want to approach it and in some cases.
So 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.
Altra deal, but as I said earlier.
We have the ability, which is nice to be quite selective on all these deals and we will continue to exercise that.
Okay. Thank you.
And your next question comes from the line of Doug Young of days, Jordan <unk> capital markets.
Good morning question for Dan I guess.
We saw the expected profit down in the U S. 8%, then I would hazard a guess that's probably related to the adjustments made for the in force, but what I wanted to understand was there an impact at all from your outlook on the group business.
And with that can you talk a little bit more about any competitive threats or trends that youre seeing in the group business you mentioned that last quarter, just hoping to get an update.
Yes, Thanks, Doug.
Primary drivers for the change in expected profit as you noted we're at the lower interest rates on its impact on the <unk> business.
In the group business, we included some impact 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 in 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 of course, it remains a very competitive market.
But we don't see any substantial changes in the competitive environment year over year.
So youre building in a weaker group results from an expected profit perspective, because of your outlook for higher mortality experience in 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 in.
But the other factors are important as well.
Okay. That's fair and then maybe for Steve SLC underlying earnings were down 8% definitely below what we were looking for I just.
And obviously below maybe the guidance or that day.
What we talked about maybe at the Investor day, obviously looking out, but but what I'm. Just wondering is there anything unusual on these results as they kind of weighed on it this quarter, just hoping to get a little more color.
Yeah. Thanks, Doug I am glad you asked the question as Matt had mentioned, we did have some kind of term one off on timing of expenses in the quarter the biggest related to.
Some appreciation in long term incentive units on top greenhouse that we expense in Q1 and hadn't accrued for throughout 2000.
2020, we had some other charges related to some retirements and some other things related to carbon sanction and all those things hit in Q1, and it was a quarter. When we didn't have kind of an offset where we had some kind of onetime revenues as we saw on the fourth quarter.
I would say that our underlying earnings within our core earnings in 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 progress, calling Florida and the first is that this is a pretty stable business because our lenders is stable and that means that kind of be the basic core earnings driven by management fees are stable and they've been rising limits ground.
But on a quarterly basis, you will see some fluctuations from time to time in the fourth quarter of last year.
We were above that kind of core earnings right, because we had some catch up fees in the quarter.
On performance fees in those sales 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 on rising and as I said the first quarter was definitely on that basis in line with our guidance on our expectations, but that leads to my second point, which is I think one of the best ways to track that.
This business over time is by tracking our inflows.
Our ability to attract new investors to our platform and in this quarter as you see on the numbers the inflows were very strong.
On teens per slide we noted that fee eligible inflows were $8 6 billion and even if you deduct the $2 billion of outflows that's almost 4%.
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 of SLC is going to continue to rise and then the only and the final point I'll make is that I think the breadth of accounts flow is important we've got a product platform across many different asset classes.
And this was a good example, this quarter we that eight six is made up of wins across the platform from fixed income closing constant private credit raising a CMO.
Doing a follow on offering.
One of our most advanced on the UK and infrastructure centric. So we feel like we're starting the year with some pretty good momentum.
I'm, sorry, Steve if I could just clarify that $11 million 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 no I'm, saying that or yes, I'm, sorry that the $11 million I think it is kind of lower than we would expect because of those one.
So those expenses that I would kind of say were unusually large this quarter.
And have you quantified those.
We haven't done I don't think we've called those out on our specific results, but what I will I will say it. This way we can I think during Investor day, you gave a sense of what we thought our core underlying earnings ramp does today. This quarter was consistent with that and it's also consistent with the longer term guidance.
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.
Your table on interest rate sensitivity on.
Drill down to the OCI component.
I noticed that the impact to OCI from the 50 basis points parallel shift is still about 250 million on this quarter versus last quarter. So it hasnt changed and I understand that you round it up to the ore down to the nearest 50 million, but maybe.
Maybe you could just speak to what's helping you.
Minimize the interest rate sensitivity or the impact from interest rate shifts to like cabin on how you 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 on 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 on 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.
As in the numerator and the denominator, but the <unk>.
Size of the shots I will note do go up and down with the different changes in economic environment and so what we've observed is in the current environment, which is higher interest rates generally, especially across North America, we've seen our sensitivity come down on both the up and the down charts and I think that that's a good profile and I think it's also a bit of.
On natural profile to them.
Okay.
Environment becomes less stressed we're seeing kind of less less movement in loss counters.
On that kind of cyclicality on the moves as.
As we're moving out of the interest rate environment.
That's really helpful. On if I could just finish off with a broader question on.
Earnings on surplus it we've seen a pretty sizable increase in yields recently in the first quarter and I know it takes a while for that too.
Flow through to invested assets and invested asset returns, but do you have a sense on when.
Underlying net income could start benefiting through higher earnings surplus if yields stay where they are or continue to move higher.
I can take I can do is Kevin strain I can take that one you were still expecting the earnings on surplus to Billy roughly 100 million Thats kind of what we've talked about in the past.
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 net number there the $100 million.
Okay. That's helpful. Thank you.
And your next question.
On Humphrey Lee with Dowling and partners.
Good morning, and thank all of them, but came on questions.
First question is about net flows in MFS.
You had very strong gross sales so I think it might be on a D. That's the strongest.
Actual funds.
But redemptions kind of spiked up in the quarter I was just wondering do you have any color that you can share in terms of what you saw in mutual fund net flows.
Yes, good morning, Humphrey its Mike.
Yeah, I mean, clearly had strong gross 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, an equity book of business and we see when markets are at all time highs you see de risking and rebalancing back.
Into fixed income during those periods of time, which is the converse of what we saw a year ago, where we saw better flows in that business. So that was not surprising year over year on our non U S retail business. So our U S. Retail business continues to generate strong growth and strong net on the non U S. Retail we did see higher redemptions in the quarter driven by I think a couple of factors one is <unk>.
As we've seen.
Sort of 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.
And so it's a.
Through cycle, that's going to produce a return relative to cash investor cared a lot about that a year ago. When they were worried about downside and investors today, clearly arent focusing on downside and so we've seen net flows go from positive in that particular product to negative and so those would be the things that I would 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 continued to struggle on active and I think you know the way that we look at it as a relatively flat quarter when money continues to move in chase performance.
Relatively pleased the thing that we control as gross flows and we continue to see strong growth.
Got it. Thank you my second question is related to enforce management I think in the past you've talked about like the business and you you focus on optimizing it and drive better cash flows and balance all of it but given the the increase 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 thank you for that question.
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 close block insurance businesses in the United States over the past number of years and my guess is as you look ahead youll continue to see lots of interest in those businesses, particularly.
Really as more capital moves from public to private hands. So I think we've been consistent on this we we've been focusing on improving the execution on the performance of the enforce management business. We've made great progress great progress on expenses on on capital on tax on.
On.
Dealing with some of the day issues, including Stranger owned life insurance, where we've made great progress sorting out some of those issues and we still see some there's 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 in 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.
Should you wish to listen to the rebroadcast it will be available on our website. Later. This afternoon. Thank you and have a good day.
This concludes today's call. Thank you for your participation you may now disconnect.
Yeah.
Okay.
[music].