Q3 2021 Sun Life Financial Inc Earnings Call
Good morning, My name is banning araby your complaint.
At this time I would like to welcome everyone did he find life financial Q3, 2021 financial My thoughts conference call.
I'll make that complaint I need to prevent any background noise.
The speaker's remarks, there'll be a question answer session.
Hold up a call and you can eat baby Vicepresident head of Investor Relations and capital markets least go ahead distributed.
Thank you Suzanne and good morning, everyone.
Welcome to sunlight earnings call for the third quarter of 2021, our earnings release in the slides for todays call are available on the Investor Relations section of our website at <unk> Dot com.
We will begin today's call with an update on our quite in fact strategy.
And an overview of our third quarter results like Kevin stream.
And Chief Executive Officer.
Knowing Kevin's remarks Magic thing Executive Vice President and Chief Financial Officer will present, the financial results for the corner.
After the prepared remarks, we will move to the question and answer portion of the call other.
Other members of management will also be available to answer your questions. This morning.
Turning to swipe to draw your attention to the cautionary language regarding the use of forward looking statements and all night.
Financial measures, which form part of today's remarks as noted in the slides forward looking statements may be rendered inaccurate by subsequent events.
With that I will now turn things over to Kevin.
Thanks, you even good morning, everybody trying to fight for I'd like to start by sharing my thoughts on our strategy since becoming CEO the executive team and I have taken the opportunity to reflect on and discuss our strategy with a focus on our purpose our clients our strength our priorities and on our outcomes.
We've refreshed are quite an impact strategy, which build on our strong foundation over the past 10 years. Some life has been on a strategic course that is delivered exceptional value to our stakeholders.
We built on this foundation and added emphasis on digital leadership sustainability and client impacts we prioritize for growth areas thinking and acting like a digital company leveraging the strength of our capabilities in both asset management and insurance deploying capital into M&A that is strategic and add scale or capabilities.
And building on our health strategy in Canada U S in Asia.
Our purpose to help clients achieve lifetime financial security and live healthier lives and our four pillar strategy made up of asset management, Canada U S. In Asia have served as well and will continue to be central to who we are and what we do today with nearly half of our underlying the income being driven by asset management.
We have a balanced business model, where both asset management and insurance have strong foundations with tremendous growth opportunity supported by macro trends and most importantly, the ability to fuel our future success with the right people and cultural supported by a trusted brand.
Our strategy keeps our clients of the center of everything we do whether helping clients navigate health concerns save and plan for their retirement or provide financial security for their families. Our focus is on the impact we have on their lives. Our strategy focuses on digital leadership sustainability financial discipline and distribution excellence.
Did your leadership is about accelerating our digital capabilities as well as changing how we work together, we want to work in a more agile way driving faster decisions that are made closer to the client in short, it's about thinking and acting like a digital company to create deep client relationships and deliver exceptional client experience.
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Sustainability is an imperative for us our employees clients and investors have told us that sustainability is important to them.
We believe that to be a truly sustainably driven company or plan must be purpose driven that's why we the lines are sustainability plant directly to our purpose to areas. We know best health financial security and sustainable investing all to benefit to the benefit of our clients investors and communities.
And we're continuing to emphasize measures that have supported our success acts selling and distribution whether it be in sunlight through our advisor channel third parties or new innovative channels combined with a prudent approach to financial discipline that includes financial performance risk management and strong capital management.
Ah refresh strategy brings together the elements that have been core to our success with emerging areas of increasing importance and support their ambition to be one of the best asset management and insurance companies in the World turn to slide five we've made some great progress, bringing our strategy delight.
In October we announced our intention to acquire dented quest, a leading dental benefits provider in the United States with approximately 33 million members. The acquisition is right on strategy to grow our us business and advances our sustainability strategy, focusing on improving health and wellness outcomes for all and like our existing use group benefits business.
Dented glasses capital late with low tail risk and replaceable offerings, all with support our medium term financial objectives as.
As I mentioned earlier sustainability is an imperative for sunlight and this quarter I was pleased to a point, our first chief sustainability Officer, Atlanta Boyd reporting directly to me she will build on our long term environmental and social commitments to design and lead greater sustainably performance for some life.
Yesterday, we announced a goal to achieve net zero by 2054 operations as asset owner and manager. This includes commitments made by MFS, Ethel Gi infrared and Biggio, who have all joined the net zero asset managers initiative pledging towards the two pledging to achieve net zero greenhouse.
Gas emissions for the portfolio by 2050, we continued to transform our business with a focus on digital leadership in Canada are digital coach Ella continues to delivered nudges, leading to meaningful client impact with nearly $600 million in wealth deposit and $800 million in insurance coverage sold this year.
This past quarter, we started the rollout of digital financial planning to Canada in partnership with conquest planning. This tool compliments, our holistic advice model addressing a broad need for all Canadians to have a financial plan will.
We will be introducing digital capability across all wealth insurance service platforms, enabling us to proactively respond to clients evolving financial needs.
During the quarter, we completed the acquisition of clinical care in the U S and lives health navigator supported by Pinnacle care and our stop-loss portfolio.
This solution offers a concierge approach to guiding members through the complex U S health care system, helping to ensure they get the right diagnosis doctors and treatment for their conditions, leading to better health outcomes and experiences in.
In Asia, we've seen a significant increase in digital adoption, 69% of new business applications were submitted digitally in the first three quarters of the year up 51 percentage points over last year.
Turn to slide six I'm pleased to announce that we are increasing our return on equity medium term objective to 16% plus from a previous objective of 12% to 14% over the past decade, we've made significant moves in our strategy to diversify our business mix and shift away from capital intense interest sensitive businesses.
Wealth and asset management. In addition to capital late group and sort of duration insurance businesses now drive approximately 80% of our underlying earnings mix.
This ship coupled with our strong track record for execution makes us the right time to update our underlying row objective turn to fight seven we.
We delivered a strong third quarter that underscores the strength of our diversified business mix.
While we're seeing a lot of progress with a widescale roll out of vaccines, we are still feeling the impact of the pandemic around the world.
Our employees and advisers continued to be therefore, our clients as we have throughout the pandemic to date sunlight as delivered more than $700 million in COVID-19 related health and life insurance benefits to clients and their families at a time when they needed. It the most in the third quarter reported net income increased to judge.
Over $1 billion up $269 million over last year underline net income and earnings per share increased 7% driven by strong results in wealth and asset management, partially offset by mortality and morbidity impacts from COVID-19, primarily in R. U S in Asia pillars.
We generated an underlying return on equity of 15.6% in the quarter and also maintained are strong capital position.
To sum it up it was a strong quarter for sunlight, reflecting the efforts and complishments of our employees and advisers and there can then continued commitment to our purpose of helping clients achieve lifetime financial security and to live healthier lives before I turn the call to manage it I would like to touch on a recent update on our executive team leadership.
Last week, we were pleased to announce the appointment of Inger Johnson, our new President of sunlight Asia. We're excited that introduced joining some like she'll be a great addition to the executive team and will join the call in queue for with with that I will now turn the call over to manage it who will take us through our financial results.
Thank you Kevin and good morning, everyone Slide nine provides an overview of our third quarter results.
Some life delivered record quarterly earnings, reflecting the strength and resilience of our four pillars strategy reported net income of just over 1 billion was up 36% driven by market related gains in higher underlying net income.
Underlying net income of 902 million and underlying earnings per share of $1.54 or both up 7% from the prior year driven by good business growth favourable credit experience in higher tax exempt investment income.
This was partially offset by unfavorable covered related morbidity and mortality experience in the us and Asia.
Currency movements resulted in a 36 million unfavourable impact a year over year earnings.
Underlying return on equity was 15.6%, reflecting strong business growth and our lower capital business mix.
Assets under management ended the quarter, and almost 1.4 trillion, reflecting market value growth and another quarter of strong net inflows at SLC management or wealth businesses in Canada and Asia also delivered strong growth has increased 25 billion year over year.
Book value per share increased 5% over the prior year, excluding impacts in other comprehensive income book value per share was up 11%.
Our balance sheet position remains strong with like half basis of 143% and 124% at SLA.
Selloff ratio declined four percentage points from the prior quarter, primarily driven by $725 million a preferred share redemptions, we announce last quarter.
Cash at the whole call ended the quarter at 2.8 billion and the financial leverage ratio was $22 2%.
Subject to regulatory approval, we intend to redeem an additional $300 million preferred shares at the end of the fourth quarter. Upon redemption SLS Leichhardt ratio will decreased by approximately one percentage point in the financial leverage ratio will declined by approximately 70 basis points.
Slide 10 outlines the performance of our business groups, Canada had strong reported net income of 393 million in line with the prior year as market gains in real estate investments were mostly offset by an update to allocations between the participating policyholder and shareholder accounts for prior years.
Underlying net income was also strong at $290 million and in line with the prior year driven by higher contributions from wealth management businesses and favorable credit experience offset by morbidity and group benefits and expense experience.
The U S reported net income of $46 million, an increase of $159 million for the prior year largely reflected lower akhmat charges underlying net income decreased by $14 million and 14%, primarily due to mortality and morbidity experienced an employee benefits.
This was driven by elevated COVID-19 related claims of approximately U S 50 million, reflecting a significant increase in case counts in the working age population.
This is partially offset by favorable stopped lost morbidity and favorable favorable mortality claims experience and enforce management.
The U S grip benefits business achieve an after tax profit margin of seven 7% on a trailing 12 month basis above or target of 7% plus.
Asset management reported net income of 301 million up $50 million from the prior year driven by higher underlying net income both from MFS, an SLC management.
MFS underlying net income was $327 million, an increase of $51 million over the prior year driven by higher average net assets, partially offset by higher variable compensation expenses and the impact of foreign currency translation.
MFS ended the quarter with a pretax net operating margin of 42%.
SLC management generated underlying net income of $35 million up $17 million from the prior year driven by good AUM growth and gains in seed investments, partially offset by higher compensation costs.
And Asia reported net income was $288 million up $52 million a year over year.
This was driven by arcmin market later related impacts partially offset by currency translation.
Underlying net income of $145 million includes 11 million of unfavourable impact from current from currency movement on a constant currency basis earnings were down 5% a good results driven by give.
Given mortality headwinds of approximately $25 million a quarter relate to elevated COVID-19 claims in the region with Indonesia, Philippines, and India seeing larger impacts.
This was largely offset by strong results in our fee based businesses across insurance wealth and asset management in Asia, which account for nearly two thirds of expected profit.
Corpus reported net loss of 9 million was in line with the prior year, while the underlying net loss of $5 million improved 40 million from 40 million driven by higher tax recoveries and favorable credit experience, partially offset by higher project spend.
Turning to slide 11, we provide an overview of our sources of earnings expected profit was up 12% from the prior year.
Excluding asset management and the impact of currency expected profit was up 9% driven by higher fee income in Canada, and Asia wealth in Asia wealth businesses, as well as growth and use stop loss.
New business gains of $6 million were consistent with the prior year.
Experienced gains of $172 million, primarily driven by market related impacts, including strong real estate gains.
This is partially offset by mortality experience driven by COVID-19 related impacts in the U S in Asia as well as higher incentive compensation driven by strong year to date results.
Earning the surplus of 150 $150 million increased $19 million from the prior year driven by Afm's gains in higher fair values on investment properties.
During Q3, we completed our annual review of assumption changes in management actions, which resulted in a pretax gain of $93 million.
The review included favorable updates to mortality and morbidity experience expense margins as well as model enhancements. These.
These were partially offset by updates to lapse in other policy policyholder behavior predominantly in use in forest management as well as investment related assumption updates.
Investment related assumption updates included a ship to the new ultimate reinvestment rate and net ultimate credit spreads, resulting in an after tax loss of $79 million.
Slide 12 shows insurance and while sales on a constant currency basis individual insurance sales were down 7% Canadian individual insurance sales were up 26%, reflecting higher participating whole life sales.
Asia individual insurance declined by 16% in constant currency as a result of lower sales in Asia International hubs.
Local market sales in Asia increased 13% in constant currency driven by higher individuals sales in the Philippines, India and Vietnam.
The third quarters are broader broader corporate related shutdowns and movement restrictions across southeast Asia or advisor in that region continue to forge ahead enabled by new digital tools and capabilities to engage with our clients and provide solutions that meet their needs.
Group benefit sales were broadening in line with the prior year as kind of a sore pick up in large case sales coming to the market, while U S employee benefits and stop losses software sales were down compared to a strong sales results last year.
While sales excluding asset management increased 7% year over year in constant currency.
In Canada sales were solid at five 9 billion, but down 13%, reflecting a large defined contribution sale in the prior year.
We continue to see an increase in individual wealth mutual fund sales.
And Asia, while sales increased by 58% in constant currency driven by mutual fund sales in India money market sales in the Philippines, and the pension business in Hong Kong.
Asset management gross flows were largely thought year over year, driven by increases in SLC management offset by lower gross flows and MFS.
SLC management had strong net inflows of four 6 billion showcasing the benefit of our diversified strategy and asset management.
MFS ended the quarter with you is $2.2 billion net outflows, reflecting institutional outflows, partially offset by the 11th consecutive quarter of net retail inflows at MFS.
Value of new business generate in the third quarter was $290 million up 14% in constant currency compared to the prior year, reflecting strong sales in Canada and higher margins in Asia.
Turning to slide 13, operating expenses were up 12% from the prior year.
This is primarily driven by higher incentive compensation sales distribution costs, and our asset and wealth management businesses, reflecting strong revenue growth.
To conclude this quarter once again highlights the strength of our diversified business mix, our asset management business has continued to benefit from strong investment performance and demand for our broad street of capabilities.
In Asia, we're seeing that benefits from our investments in digital as local market sales maintained good momentum despite COVID-19 restrictions.
R. U S business continues to build a leading health platform, including the announcement of the Denticles acquisition earlier this quarter and.
And the Canadian business continues to Leverages leadership position in group and wealth management business to deliver strong growth.
We believe that the strength of our diversified portfolio of businesses positions as well for continued growth and supports the increase to a medium term underlying ari objective of 16% plus with that I'll turn the call back to you need for Q&A.
Thank you mandate to help ensure that all of our participants have an opportunity to ask questions. This morning, I would ask you to limit yourself to one or two questions and then <unk> with any additional questions I will now ask Suzanne and pull the participants.
Thank you if you would like to ask a question. Please press Taiwanese I'll think keep happening if you would like to we got a question. Please press upon Keith.
Our first question comes from the lineup.
Many common from Scotiabank.
Hi, Good morning, just a question on the new Arrow target.
Your underlying are we have been tracking above the high end of your previous range of 12% to 14% for some time now.
With rare exceptions, it hasn't been above 16%. So I'm just wondering why you tell at 16% plasma.
Putting a finer point on it.
What do you see that is going to get you there.
That kind of.
Step up in a row, even relative to what you have done.
Good morning minutes management. So thank you for your question as he had mentioned we've been performing well on the road for quite some time in the above 15% and we have continued to add to our portfolio a strong businesses. So you've seen us add capabilities.
Alternative asset management, SLC, and then more recently with our acquisition Identa Quest, along with continued growth and all of our existing businesses and all of our pillars. So if we kind of look at that and this is this is a medium term target. We continues to see opportunities for further growth and that's what supports our view of the 16% plus.
Manjit I appreciate it the medium term target your expectation be that you could get there.
In 2022 would that be reasonable.
I think we don't really comment on sort of.
One year year outlooks, many I think that'll depend on what the environment is next year, but again, we think it's a really good and achievable goal over the medium term.
Thank you.
Next question comes from the line is Gabriel.
Kind of National Bank financial.
Okay.
Good.
Good morning about the experience items in the group businesses in Canada, and the US I guess, there's some more skewed towards the U S. Just want a bit of I guess confirmation that these are issues.
Directly to COVID-19.
Group mortality short term disability in the Lake and Naughty.
An indication that we're starting to see higher benefits utilization.
Even to your group margins.
Yes, good morning, and Gabriel it's Dan fish Fine I'll I'll start out on that question for the U S.
Yes, I would confirm that the mortality and morbidity results. We saw in the group business. This quarter are COVID-19 related.
Third quarter was the worst quarter for mortality in the U S. In the working age population since the pandemic began.
And some of that is related to the delta variant and how that interacted with vaccination rates in the us.
The population over the age of 65 is now more than 85% fully vaccinated, but the working age population is only about 65% fully vaccinated. So in the third quarter, we saw a big shift in mortality into the working age population, obviously had it not been for vaccination.
<unk> that Delta variant would have been even much worse than it was but those who are unvaccinated in the working age population were particularly vulnerable. The CDC reports about 120000 deaths in the us during the third quarter and for the first time more than 40% of those deaths were in the working age population.
That led to the highest rate of deaths in that population. So in our own results as management noted we had 50 million after tax.
Mortality and morbidity that is related to COVID-19 in the group businesses about half of that is mortality about half of that was disability. As you noted most of that short term disability.
With Covid often have a view out of work for some time for for that reason.
And there really are no signs that there are other issues beyond that mortality and morbidity in the group business.
I'm sorry, our missiles.
Previous Cressner apologize rehashing when you can just tell me earlier, but but target that you gave the 16% put that as a.
Is that an indication that you expect to earn return and and the <unk> 17 world or or cash there.
Good morning, Gabriel expanded so as we've mentioned before we're not providing ifr's updates at this time will provide an update closer to the time of the adoption as guidelines got finalized but I can tell you is that we're very pleased with the strength in diversity. The businesses. We've built we think they have very strong fundamentals, including good opportunity to feed.
Your growth there were a price of all over the short term and they have lower interest rates sensitivity and then as you know we've added to that stable businesses with the addition of SLC and then to quest, which are also coppola lightened generate high cash cash cash flows. So overall, we feel very good about the ability of these businesses to generate good returns over the medium term.
Just seems odd that a year.
Year for malware changing that number because of that I can only change.
Order a burger anyway. Thanks.
Think I think Gabriel's, Kevin we looked at it and we've been well in excess of 12% to 14%. It seem more odd to me to leave a 12% to 14% sitting out there than it did to actually address it in and think about how we would think about the result of the IRS or basis.
Fair enough.
Our next question comes from the line is dog Gal can be driving capital market.
Hi, good morning, just to the Ahmed.
Discussion I guess first lapsed continues to be an issue and not just for yourself across the industry and I know that there is unusual items that may have occurred during the pandemic, but I'm Mark curious I mean that was in charge of $174 million in the quarter I'm curious as to what you are seeing how you built that reserve or use assuming.
That the current labs, right stay consistent or you're making the assumption that last rates will referred back tomorrow prepandemic level, just hoping to get a little bit of color on that.
Yeah. Thanks for the question this is Kevin Morrissey.
As you noted for the outcome of the policyholder behavior strengthening it was it was really all in.
You asked in Forest management block of business will review this year as a key focus on the universal life funding assumptions to better align with valuation assumptions in recent experience.
So the changes be made this quarter fully address the recent experiences losses that we've had over the last several quarters. So we did a lot of back testing and analysis to ensure that are updated assumptions supported ongoing environment and the good news we saw the U S Q3 experian.
Neural for the quarter four laps and policyholder behavior.
So looking forward the policyholder behavior will be dynamic and sensitive to market and then the condition. So we'll continue to monitor closely but we feel good about what changes we've made and comfortable.
We expect.
Forward looking forward.
So just to confirm I mean, that's experience up to the end of Q2 were up to the end of 2020 that you baked in.
That would have been an experienced up until the end of last year.
But we also looked at the trend into this year as well so I would say.
I would say really reflects the full experience going back prior to this quarter.
Okay, and then just on Asia, obviously, you cope it.
Created some challenges one on the sales side and the second on the mortality side.
Just hoping to get maybe a little bit of an update as to what you're seeing so far in Q4 and what type of rebound.
Would anticipate to see in Asia as reopening starts to take hold so any updates on that front would be helpful. Thanks.
That is Kevin on Asia, and you're right. We certainly saw the impacts of Covid during the quarter from both claims experience at a sales experience side, although we fought through that in our local markets right. We had the.
The Philippines that was up 25% in local currency and 17% in Canadian dollars.
But there was sort of widespread lockdowns, which had which had impacts.
What we're seeing is the vaccine rates are going up across across the ASEAN countries were in.
And we're seeing the economy's opening back up it's a little bit early to tell whether that will continue because like the U S that delta variant has been quite impactful, but we are seeing those economies open back I make just give an example of Vietnam right. You saw our sales were up in Vietnam, but we would have expected them to be up a lot more the country.
Was that essence in lockdown, because they had very low vaccine rates and the Delta variant had started to spread and so people weren't going into the into the bank and they weren't buying bancassurance products.
Started to reopen now this quarter and we should see some flows come back vaccine rates have gone up significantly although many people have only got there first vaccine and so that's just an example in each market is playing out in its own sort of right. So we are seeing the economy's start back up.
And we are seeing more vaccine rates, but it is early to say what will happen because kobe has taken.
Past that have been unexpected.
And maybe Kevin just to kind of finish up apart.
Yes, but we should be thinking of is more of a gradual whenever you're curious talked about Martha garage, what kind of impact is reopening happens is that is that the way you would kind of think of how we should think of Asia over through.
Through 2020 essentially.
Yes, I do think it's quite different bye bye market, though right like if you look at China, Hong Kong, they're focused on opening up the China, Hong Kong border, they've really closed that down.
Inside of China, it's been quite open from a kind of movement and flows perspective. So every every country is a little different than the thing to watch I think is the vaccine rates and is the economy opening up but I do expect I think you're right that will be gradual and then for businesses like our high net worth which do.
You rely on a bit of travel where the sales are made primarily through Singapore and Hong Kong.
That is going to take a while to to really open up.
They're still again vaccine rates have to be much higher before they're going to be fully open to travel.
I appreciate it thank you.
[noise] next question comes from the lineup, David Moulton Megan from Evercore ISI.
Hi, good morning.
I just had my first question on the road to 16% Ro how much of that is driven by a mix shift capitalized businesses have continued mix shifts to capitalize capitalized businesses versus improving the row and the segments that require capital.
Because if I look at 2018, 2019 row, which are cleaner than the last few years.
Rowe he's in the U S and Canada were around 14, 15% and around 10% in Asia. So just wondering how you are thinking about.
The source of of getting to that 16% target.
Good morning, David It's management I think we're looking at the.
The portfolio of businesses that we have now and how those businesses will perform looking forward and I think as we look across all of those businesses, we see opportunities for growth across each one of those businesses and additionally, see lots of opportunities for those businesses to work more integrated together and then kind of leverage the the strong capabilities, we built across various platform.
So when you put all that together, we feel we feel that the 16% pus are always very achievable.
Okay, and then maybe just switching gears to MFS.
Yeah, I just wanted to just.
Talk a bit about.
What what's driving the outflows overall I understand in retail flows have been positive for I think it was 11 straight quarters.
But there I guess.
They're falling in terms of absolute dollars as well as a percentage of the beginning of period num.
So when I sort of look through it looks like the redemptions are actually.
Under control and it looks like sales have been.
I guess weaker than what I would have expected so could could you just talk about.
I guess the outlook on sales and why sales have been so weak.
Good morning, David This micro bears I appreciate the question.
Same themes that we've talked about actually over the last couple of quarters first would be on the institutional side with a.
Virtually entire equity book institutional block of business, we continue as the market trades at all time highs, we continue to see rebalancing activity and derisking activity in that book. So that's what's driving the institutional flows on the retail side.
You look at it year over year, you see a reduction in sales I think.
Probably speak to call out last year was we had such a massive increase in sales out of two 2019 and again much of that was an allocation back to equities and we were well positioned for that when you look at our sales right now relative to the industry industry sales and active mutual funds have come down and our sales rate is coming down in line with the industry. So there's nothing going.
On and our sales that's any different than what we're seeing any industry.
Think there's hesitancy as the market makes all time highs in retail to continue to allocate make net new allocations to equities and we're seeing that same thing in our books. So it's the same themes that we've talked about over the last couple of quarters.
Got it thanks and maybe.
The performance metrics that you provide it looks like the three year numbers.
Have fallen a bit over the last several quarters, but.
I'm more interested in the percentage of your.
That's in the top quartile.
Compared to your peers versus the top half because my understanding is that is what's really driving.
New business. So I am wondering if that has changed.
Two of similar magnitude as as the percentage that is in the top half of the of their categories.
Well, we've seen we've definitely you've seen in the top quartile come down as well and I think I think speak to a couple of things. One is I think the performance. If you go back was.
Pretty unsustainably strong and virtually all your products are outperforming and a large percentage of the top quartile what it would say is the market environment over certainly the last year and over the last few years, we've had a very very strong.
Backdrop to the market.
Investment style is generally investing in higher quality businesses with higher row trading at reasonable valuations and the market has gone up and we've seen a lot of speculative parts of the market outperform.
And so we're not surprised by the relative performance given what the market is done.
We think that clients put us on the platforms because they understand our investment process standard they understand when will perform well and then a market environments that are more challenged than what we haven't seen is that slight decline in performance have any impact on a relative flows.
Okay.
That's that's very helpful caller. Thank you.
Next question comes from the line is Tom Makinen BMO capital.
Yes. Thank you very much good morning.
Question on dividends share buybacks, and then a follow up.
Alright, with respect and when we get the Green light here later on this afternoon in terms of the.
Dividends and share buyback and.
We will be looking at a fourth quarter 21.
That'd be like over two years since your last given an increasingly been running sort of.
North of the top end of your ankle 10%.
Underlying growth objectives.
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How did.
How does that translate into like a given an increased potential, but 20% and perhaps.
Even higher Jesse given the fact that you are running lower than your target payout ratio.
Wow.
If you can talk about them share buybacks as well because we're active buying back stock prior to.
Descriptions as well thanks.
Tom It's Kevin.
Take this imagined may may jump in but if you look we've got our guidance out there of 40% to 50% of our underlying earnings for the dividend and we've talked about that in the past that that's what our objective would be of course, our dividend needs to be approved by the board right. So I'm not going to talk about what we're gonna do an advanced but but getting back into that 40% to 50% would be our target and we need osophy.
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Allow for that on the buyback our position hasn't changed we deploy capital into our organic growth.
Towards the dividend as our first objective into and M&A when it's there and when when M&A. We look at they are in a pipeline and when we can we don't have enough in the pipeline for the capital. We're generating then we use the buyback program and so it would be very specific to the timing of what's going on what's happening what's in the air.
Pipeline, what's in our organic growth objective. So we look at all of those things when we when we make that decision.
And that's how we think about capital deployment.
Okay.
Question for Dan, maybe just as we move into the fourth quarter that seems to be the busy quarter for pricing and stop loss of employee benefits.
What are you seeing here, especially given the fact that.
Experience hasn't been.
As good as would have been anticipated that with all the COVID-19. So we will talk about it.
Outlook for the pricing Wyoming.
Yes. Thanks, Tom This is Dan into a great question, because we are of course heading into the quarter and the quarter that has most of our sales activity, it's actually a good.
Time to remind that the third quarter is actually not a big sales quarter only about 15% of our sales happen in the third quarter.
But what were.
Seeing is a competitive marketplace right now and.
And it is somewhat more competitive probably than it has been over the past couple of years. So we're still selling at very high levels were leading the industry by a wide margin in stop loss sales.
Our sales are up year to date in our group business, which is great but.
But we are sticking to our pricing target. So if we have to make tradeoffs it will be to sacrifice a little bit of volume to.
To maintain our pricing targets in our margins and we are seeing a somewhat heightened level of competition at the moment.
Okay. Thanks for that.
Next question comes from the line of pollen from CIBC.
Thank you good morning.
So I just noticed that part of your.
Changes.
This quarter, where for a reduction in the best estimate.
Real estate assumption. So just wondering if you can tie that back too.
What you're seeing.
L C.
And the real estate funds you run there and if you don't.
Continued uncertainty I guess.
Particularly in commercial real estate is impacting.
And it all for command and returns of those products.
All of this all is coming.
I was going to maybe just address the asthma and then Steve I'll, let you talk about the experience in the corner.
So so Paul maybe just a comment we did strengthen the real estate assumption and I do want to specify that the fact that we look at long term assumption right. So it's kind of long term through the cycle. So we look at.
Past performance as well as future expectations level of interest rates and this premium for these types of asset classes. So we did make an assumption change in the quarter to reduce the best estimate.
Despite the fact that we had really positive.
And the real estate Mcwhorter, maybe Steve Hall, and it also can you talk about the real estate for the quota.
Yes, Thanks, Kevin Paul certainly and to the pandemic there were certain sectors retail office that were weaker but there have been other sectors, such as industrial sub sector, such as cold storage, which have been extremely strong if you look across the.
The biggio Venturino funds, there have been overweight sectors like that so actually if you look at a variety of funds in Europe and North America.
Canada also and.
Asia and the fund performance has been quite strong in fact, there use core fund had one of the best quarterly returns it's ever had.
The Asia.
Funds are heck delivered recently over 30% returns net so and they've had.
A very active year in terms of attracting new capital, So and I would attribute part of that Navy and trying to connect it back to the Acme charges. If you look at that top greenhouse on the SLC side, a lot of those a lot of their money is in core plus or value add real estate, where it's in some ways less about general trends in <unk>.
Real estate and more about.
<unk>, and then making improvements to properties and then selling them for a total return. So so I would say that the interest in real estate, we feel like continues to persist based on what we are seeing from our investors and the returns that continued to be.
Pretty strong.
That's great and then I just have one additional question relates back to the the locks discussion I just want to verify that.
Sort of these locks assumption changes we've seen.
Over time have really related to legacy product in that.
Newer products being sold is less dependent on lots assumptions does that is that correct on my part.
Paul that's right, that's because marcy lots experience that's been negative that we've seen over the last few years as well as the strengthening have all been in close legacy block, it's not related to the new business consultant that's right.
Okay. Thank you.
Next question comes from your line of stock on hearing from RPC capital market.
Hi, Thank you good morning I just.
I realize that the the expense allocation and investment.
Allocation from the bar is small.
But.
I just wanted to ask you for a little bit of color on that.
And the reason why I ask is typically we think we all know the part.
These pass through and never really.
Has any sort of.
Ultimate large risk but.
But I guess you pulled seed money out of it before and so now I'm wondering is this sort of an asymmetric risk.
And sort of going forward from now on the.
The only thing that can happen is potentially.
An allocation.
Like this that could affect the company in future and you continue to sell I understand a lot of power policies, which will only make this bigger as time goes on can you maybe just touch on that.
Just to sort of assure us that.
Those small prosper.
Prospect if possible future.
Reallocations like this really won't happen in effect.
Affect you.
Hi, Darko this is Kevin thanks for that question.
So this was not a cost.
<unk> with the risk of the policy.
Password. This was the one time prior period part adjustment and it was really refinement to pre 2016 allocation of investment income and expenses between par and shareholders.
So the structure of the <unk> agreement result in need to allocate different costs like investment income and expenses across the two accounts and this quarter adjustment resulted in a benefit to the park count this quarter and that costs of the shareholders $85 million about half of that.
Was just adjustments to the prior period allocation and half of that was interest accrued.
To bring that to the current quarter and those allocation adjustments happened between.
2008 in 2016 cents some time ago.
It's quite complicated and it's related to the accounting changes back in 2007, and your interactions do neutralization par account structure. So there is no impact of future.
Earnings and I'd say this isn't something that's likely to occur.
Again, and it really is not related at all to the the profile of the products in the past and features of the part products that were selling more.
Okay. Thank you.
Next question comes from the lineup Nigel.
Fairness investment.
Thank you. Good morning. The first question I had was a follow up on your adverse unfavorable mortality experience in Asia, and I think you highlighted Indonesia, the Philippines and India. I was wondering if you could provide more color on the trends are seeing for mortality related to COVID-19.
And your insurer population versus the general population and whether or not you expect that unfavourable mortality experience too.
Continuing to persist at least in the short term.
It's it's Kevin Nigel Yes, we say heavy COVID-19 death rates in the countries, where the vaccine rates were lower that we talked about earlier and where the delta very it was more prevalent so you're right in particular, Indonesia, the Philippines, and India had a higher mortality rates, it's a difficult time for those markets and we were.
Certainly proud to be there for our clients when they when they needed us the most what we're looking at is vaccination rates and the improvement in vaccination rates in those countries and that's what's going to really help they continue to see social distancing in masking across Asia vaccine rates going up I think our experience would be roughly in line with what you were seeing in the <unk>.
Countries, you were seeing higher mortality rates in India.
<unk> in the Philippines. So that's that's.
It's really difficult to say as I entered earlier, what's going to happen from a from a claims perspective with with new variance and the fact is that they're not at the vaccine rates that we are today. So.
This this idea of getting vaccination rates higher and it's not an issue of people not wanting to get the vaccine. It's an issue of the vaccine being available. So that availability is an important step to see happen. So it's something we watch we're watching closely but it really is around finding ways to get more vaccine into the country's in fact, we're helping.
Our employees.
Back scenes and many of those jurisdictions.
That's helpful does it change the way you look at your insurance risks in Asia I mean, your longevity exposure sits outside of Asia. So are you changing the way you look at managing that insurance risk or is it more so you're looking towards the vaccination.
Programming rolling out a more equitable vaccine distribution is kind of related in the tunnel for mortality rate later risks.
Yeah, I think if you look longer term agent is going to end up getting to vaccine rates like you see in other places and so that's going to certainly help and yeah.
We are seeing even a little bit of curbing up the amount of desk this quarter I am just.
Things can change the variance can change in those types of things, but it's really not changing our our commitment and our purpose in those markets.
And if I could add on a broader question on your inflation and interest rates.
Expectations are you expecting a persistently low rate environment or rising rate environment and the reason I ask that is does that impact. The way you look at your business makes so if you have a low rate environment. That's more supportive of financial market conditions is that leading you to have a higher preference for your asset management side or if we have a variety of your environment at the change or pepper.
To have higher growth, an insurance business or do you even think about interest rates in business next could you perhaps elaborate.
I might start on that land, Randy talk about or how we're thinking about inflation and you've got a good look at our sensitivities that our disclosure we do a very good job on risk management and matching cash flows we try not to predict where interest rates are going to go. So so we worked in the low interest rate environment for a long time now we've really gear.
Our businesses towards that that's adding SLC has been been helpful. In that front Mfs's, obviously benefited from higher equity market results that also have a relation to lower interest rates, but rising interest rates are good bad thing for the insurance industry as they rise on a sustainable basis. So we think we're we're quite well position.
The diversity of our business the mix of our business. The fact that we're lower capital the way, we do risk management, we feel like we're positioned to different economic conditions and that's supported by the diversity, but maybe Randy could talk about our views on inflation and how we're seeing that.
Sure happy to this is Randy Nigel so on inflation, we've had the view for.
Several years now that we think that inflation will be less transitory than central banks are trying to portray so we're seeing both supply and demand side inflation creeping into the system.
And.
The transitory we think is more measured in several years, then months and I think that central banks are coming around to that view so.
What you heard from US said, an investor day.
Is that even the Neil the negative nominal in real right to return available on high quality fixed income.
We have done a moderate but a shift in our portfolio to non fixed income and.
In in particular real estate has noted.
Which will do well in a moderately inflationary environment. So we don't see inflation being run away by any means but we do think central banks.
Going to err on the side of letting inflation b, a little bit higher for longer.
To move away from that deflationary edge that they're so worried about so.
Q.
Yep, it's really helpful color. Thanks.
Next question comes from the lineup remark response from Cormac security.
Thank you. So there is some discussion already on the trajectory of the recovery from Covid in Asia I I'm, just wondering if if it's going to be the same in the U S. It sounds like you're suggesting that is going to be more gradual earnings recovery in Asia is that a recent thing.
You guys are.
The simple availability of vaccination suggest a faster recovery in U S vs Asia.
Well. Thanks. This is Dan let me take that for the U S portion.
I think what is important to look at the overall statistics in depth in the U S. In the Delta variants surge peaked on or about September 23rd.
And in our results. It takes about 30 days for us to get those claims and for people to submit them. So you can imagine October certainly continued to be a very adverse months for mortality now since September 2003 deaths have come down on a seven day average about 40% in the U S were certainly.
For that they will continue to come down but of course, that's very hard to predict so we would expect that our own experience will start to moderate it consistent with what's happening in the broader population.
Okay. That's helpful.
Then I.
I guess and then.
On slide Sexy Guy showed the business makes it now.
Chipping away from traditional insurance. So welcome group other short duration insurance from 2012 to 2020, we look forward. Another eight years, how do you see this evolving somewhat of a big picture question.
It's as we deploy capital and see growth, we're seeing faster growth in the in.
And the businesses that have less of the sort of traditional insurance long long duration more guarantees so I would expect that over time.
That would trend down a little bit but it's.
It depends on a lot of factors.
Okay. That's it for me.
Next question comes from the lineups quantum Canaccord January 10th.
Kevin you talked about.
Near term capital priorities focused on organic and dividends and then you mentioned NCI depend on your lemonade pipeline. So I'm just wondering what the emanate pipeline is now say versus Prepandemic.
Well, Thanks, Scott, we've always got a good pipeline that we're looking at there seems to be things given our diversity and the number of businesses were in I would point that we really talked about it I mentioned it in my strategic objectives that we have a program approach to M&A and if you look at the last few years.
Through Covid, we've done 10 different M&A transactions and they've spanned across all four pillars things like den to question Pinnacle care in the U S ACB bancassurance transaction in Vietnam.
President an infrared transaction and Steve businesses, and the addition of dialogue in Canada. So that gives you a sense of how we're looking at what we're thinking about it.
We have a broad diverse business.
And in each case, we're able to add either scalar capabilities, we had confidence in our ability to execute and they met our medium term objective. So when we look at the.
When we look at the.