Q3 2021 Sun Life Financial Inc Earnings Call
Good morning, everyone. My name is Danny and I will be your conference operator.
Good day.
At this time I would like to welcome everyone to the Sun Life Financial Q3, 2021 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
The Speakers' remarks, there'll be a question answer session.
I hope that the call is unique bidding vice president head of Investor Relations and capital markets. Please go ahead Mr. Burton.
Thank you Suzanne and good morning, everyone.
Welcome to Sun life earnings call for the third quarter of 2021, our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlight Dot com.
We will begin today's call with an update on our client impact strategy.
And an overview of our third quarter results by Kevin strain, President and Chief Executive Officer.
Following Kevin's remarks Magic thing Executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After the prepared remarks, we will move to the question and answer portion of the call.
Other members of management will also be available to answer your questions. 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 in the slides forward looking statements may be rendered inaccurate by subsequent events and with that I'll now turn things over to Kevin.
Thank you, Steve and good morning, everybody turning to slide four I'd like to start by sharing my thoughts on our strategy since becoming CEO 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 our client impact strategy, which builds on our strong foundation over the past 10 years Sun life has been on a strategic course that has 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 and 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 and Asia have served us well and will continue to be central to who we are and what we do today with nearly half of our underlying net income being driven by asset management.
We have a balanced business model, where both asset management and insurance have strong foundations with tremendous growth opportunities 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 at 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.
Digital leadership is about accelerating our digital capabilities as well as changing how we work together we wanted 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.
Yeah.
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. Our plan must be purpose driven that's why we've aligned our 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 selling and distribution whether it be in sunlight through our advisor channel third parties or new innovative channels combined with our prudent approach to financial discipline that includes financial performance risk management and strong capital management.
Our refreshed strategy brings together the elements that have been core to our success with emerging areas of increasing importance and supports our ambition to be one of the best asset management and insurance companies in the world turning to slide five we've made some great progress, bringing our strategy to life.
In October we announced our intention to acquire a dent to quest, a leading dental benefits provider in the United States with approximately 33 million members. The acquisition is right on strategy to grow our U S business and advances our sustainability strategy, focusing on improving health and wellness outcomes for all and like our existing U S group benefits business.
Tinted glasses capital light with low tail risks and reprice of all offerings, all of which support our medium term financial objectives. As I mentioned earlier sustainability is an imperative for Sun life and this quarter I was pleased to appoint our first chief sustainability Officer, Atlanta void reporting directly to me she will build on our long term environmental.
And social commitments to design, a lead greater sustainability performance for Sun life.
Yesterday, we announced our goal to achieve net zero by 2050 for our operations as an asset owner and manager. This includes commitments made by MFS <unk> infrared and Biggio, who have all joined the net zero asset managers initiative pledging to a disease too.
I think 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, Our digital coach Ella continues to deliver nudges, leading to meaningful client impact with nearly $600 million in wealth deposits and 800 million.
In insurance coverage sold this year.
This past quarter, we started the rollout of a digital financial planning tool in Canada in partnership with conquest planning. This tool complements our holistic advice model addressing a broad need for all Canadians to have a financial plan.
We will be introducing this digital capability across all wealth and insurance service platforms, enabling us to proactively respond to clients evolving financial needs.
During the quarter, we completed the acquisition of Pinnacle care in the U S and launched health navigator supported by clinical 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 Asia, we've seen a significant increase in digital adoption.
9% of new business applications were submitted digitally in the first three quarters of the year up 51 percentage points over last year.
Turning to slide six I am pleased to announce that we're increasing our return on equity medium term objective to 16% plus from our 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 light group and shorter duration insurance businesses now drive approximately 80% of our underlying earnings mix.
This shift coupled with our strong track record for execution makes this the right time to update our underlying ROE objective turning to slide seven we delivered a strong third quarter that underscores the strength of our diversified business mix.
We're seeing a lot of progress with a wide scale rollout of vaccines, we are still feeling the impact of the pandemic around the world.
Our employees and advisers continue to be there for our clients as we have throughout the pandemic.
Sun life has 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 just over $1 billion up $269 million over last year.
Underlying 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 our U S and Asia pillars.
We generated an underlying return on equity of 15, 6% in the quarter and also maintained our strong capital position.
Some of that it was a strong quarter for Sun life, reflecting the efforts and accomplishments of our employees and advisers and their 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'd like to touch on our recent update on our executive team leadership.
Last week, we were pleased to announce the appointment of Ingrid Johnson, our new President of Sun Life Asia. We're excited that angered us joining some like she'll be a great addition to the executive team and will join the call in Q4 with <unk> with that I will now turn the call over to manager 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.
Sun life delivered record quarterly earnings, reflecting the strength and resilience of our four pillar strategy.
Reported net income of just over 1 billion was up 36% driven by market related gains and higher underlying net income.
Underlying net income of $902 million and underlying earnings per share of $1 54 were both up 7% from the prior year driven by good business growth favorable credit experience and higher tax exempt investment income.
This was partially offset by unfavorable COVID-19 related morbidity and mortality experience in the U S and Asia.
Currency movements resulted in a $36 million unfavorable impact to 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 at almost $1 four trillion, reflecting market value growth and another quarter of strong net inflows at SLC management, our wealth businesses in Canada and Asia also delivered strong growth as AUM 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 remained strong with lockout ratios of 143% at <unk> and 124% at SLA.
The SLR ratio declined four percentage points from the prior quarter, primarily driven by $725 million in preferred share redemption, as we announced last quarter.
Cash at the Holdco ended the quarter at $2 8 billion and a 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 decrease by approximately one percentage point and a financial leverage ratio will decline 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 from real estate investments were mostly offset by an update to allocations between the participating policyholder and shareholder accounts for prior year's.
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 over the prior year largely reflected lower <unk> charges underlying net income decreased by $14 million or 14%, primarily due to mortality and morbidity experience in 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 was partially offset by favorable stop loss morbidity and favorable favorable mortality claims experience and enforce management.
The U S group benefits business achieved an after tax profit margin of seven 7% on a trailing 12 month basis above our 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 and 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 pre tax 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 on seed investments, partially offset by higher compensation costs.
In Asia reported net income was $288 million up $52 million year over year.
This was driven by Akamai and market later related impacts partially offset by currency translation.
Underlying net income of $145 million includes $11 million of unfavorable impact from currency from currency movement on a constant currency basis earnings were down 5% a good result, driven by <unk>.
Given mortality headwinds of approximately 25 million in the quarter related to elevated COVID-19 claims in the region with Indonesia, Philippines, and India is 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.
Corporate reported net loss of $9 million was in line with the prior year, while the underlying net loss of $5 million improved $40 million $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.
<unk> profit was up 12% from the prior year.
<unk> 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 in U S stop loss.
New business gains of $6 million were consistent with the prior year.
Experience gains of $172 million, primarily driven by market related impacts, including strong real estate gains.
This was partially offset by mortality experience driven by COVID-19 related impacts in the U S and Asia as well as higher incentive compensation driven by strong year to date results.
Earnings and surplus of 150, <unk> hundred $15 million increased $19 million from the prior year, driven by FX gains and higher fair values on investment properties.
During Q3, we completed our annual review of assumption changes and 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 were partially offset by updates to lapse and other policy policyholder behavior predominantly in U S enforce management as well as investment related assumption updates.
Investment related assumption updates included a shift 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 individual sales in the Philippines, India and Vietnam.
While the third cortisol broader broader corporate related shutdowns and movement restrictions across southeast Asia. Our advisors in the 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 benefits sales were broadly in line with the prior year as Canada saw a pickup in large case sales coming to the market, while U S employee benefits and stop losses stop loss 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 $5 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 flat year over year, driven by increases in SLC management offset by lower gross flows in MFS.
<unk> management had strong net inflows of $4 6 billion showcasing the benefit of our diversified strategy and asset management.
MFS ended the quarter with U S $2 2 billion of net outflows, reflecting institutional outflows, partially offset by the 11th consecutive quarter of net retail inflows at MFS.
Value of new business generated 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 was primarily driven by higher incentive compensation and 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 businesses continue to benefit from strong investment performance and demand for our broad suite of capabilities.
In Asia, we're seeing the benefits from our investments in digital as local market sales maintained good momentum despite COVID-19 restrictions.
Our U S business continues to build a leading health platform, including the announcement of the <unk> acquisition earlier this quarter and.
And our Canadian business continues to leverage its leadership position in group and wealth management business to deliver strong growth.
We believe that the strength of our diversified portfolio of businesses positions us well for continued growth and supports the increase to our medium term underlying <unk> objective of 16% plus with that I'll turn the call back to you need for Q&A.
Thank you Amanda.
Ensure that all of our participants have an opportunity to ask questions. This morning, I would ask you to limit yourselves to one or two questions and then re queue with any additional questions I'll now ask Suzanne to poll the participants.
Thank you if you would like to ask a question. Please press star one telephone keypad. If you would like to read a question. Please press <unk>.
Your first question comes from the line of.
Many women from Scotia Bank.
Hi, Good morning, just a question on the new ROE target.
You know your underlying ROE has been tracking above the high end of your previous range of 12% to 14% for some time now.
With rare exceptions, it hasnt been above 16%. So I'm just wondering why you chose 16% cloud can I guess.
Putting a finer point on it you know what.
Do you see that is going to get you there.
That's kind of.
Step up in a row, even relative to what you've done.
Good morning, Manny its mandate. So thank you for your question as he had mentioned we've been performing well on the ROE for quite some time and that's about 15% and we have continued to add to our portfolio of strong businesses. So you've seen us add capabilities in alternative asset management LLC and then more recently with <unk>.
Our acquisition Identa Quest, along with continued growth in 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 continue to see opportunities for further growth and that's what supports our view of the 16% plus.
I appreciate it the medium term target, but would your expectation be that you could get there.
In 2022 would that be reasonable.
Okay.
We don't really comment on sort of.
One year year outlooks, many I think there is.
It will depend on what the environment is next year, but again, we think it's a really good an achievable goal over the medium term.
Thank you.
Okay.
Next question comes from the line of Gabriel <unk> from.
The National Bank financial.
Good.
Good morning about the experience items in the group businesses in Canada, and the U S. I guess those are more skewed towards the U S. Just wanted a bit of a I guess confirmation that these are issues tied directly to COVID-19.
And group mortality short term disability and the like and not a.
An indication that we're starting to see higher benefits utilization that are starting to eat into your group margins.
Yes, good morning, Gabriel it's Dan Fishbein.
Started 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, our COVID-19 related.
The 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 interacts with vaccination rates in the U S. The.
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.
The Delta variant would've been even much worse than it was but those who are on vaccinated in the working age population were particularly vulnerable. The CDC reports about 120000 deaths in the U S. 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 just noted we had $50 million after tax.
Mortality and morbidity that is related to COVID-19 in the group business is about half of that is mortality about half of that was disability. As you noted most of that short term disability.
People with Covid, often have a view out of work for some time 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, I misspoke.
Our previous crushing.
The other person rehashing when you can just tell me, if I am, but but our ROE target that you gave the 16% plus.
It.
Is that an indication that you expect to earn that return in the IL 17 world or attached there.
Good morning, Gabriel its management, so as we've mentioned before we're not providing <unk> updates at this time, we'll provide an update closer to the time of the adoption as guidelines got finalized, but all I can tell you is that we're very pleased with the strength and diversity of the businesses. We've built we think they have very strong fundamentals, including good opportunities.
Future growth there were price of oil over the short term and they have lower interest rate sensitivity and then as you know we've added to that stable businesses with the addition of SLC and Dent to quest, which are also copper lightened generate high cash cost cash flows. So overall, we feel very good about the ability of these businesses to generate good returns over the medium term.
Alright, just seems odd.
A year from now we're changing that number because of an accounting change that might be.
Auto but anyway. Thanks.
I think Gabriel it's Kevin we looked at it and we've been well in excess of 12% to 14%. It seemed 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 results on an IRS core basis.
Fair enough.
Our next question comes from the line of Doug Young from Desjardins capital markets.
Hi, good morning, just to the Akamai.
Discussion I guess first labs 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 more curious I mean, it was a charge of $174 million in the quarter I am curious as to what Youre seeing how you build that reserve are you assuming.
That the current lapse rates stay consistent or are you, making the assumption that the loss rates will revert back to more of a pre pandemic level, just hoping to get a little bit of color on that.
Yes. Thanks for the question this is Kevin Morrissey.
So as you noted for the Ocwen to the policyholder behavior strengthening it was it was really all in you.
You asked enforce management block of business. We review this year as a key focus on the universal life funding assumptions to better align with valuation assumptions and recent experience.
So the changes we 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 our updated assumptions supported the ongoing environment and the good news we saw the U S Q3 experian.
<unk>.
ROE for the quarter for lapse and policyholder behavior.
So looking forward the policyholder behavior will be dynamic and it is sensitive to market conditions. So we'll continue to monitor it closely but we feel good about the changes we've made and comfortable with.
We expect some forward looking forward.
So just to confirm I mean, thats experience up to the end of Q2, we're up to the end of 2020 that you baked in.
That would've 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 it really reflects the full experience going back prior to this quarter.
Yeah.
Okay, and then just on Asia, obviously COVID-19 create.
Created some challenge is one on the sales side and second on the mortality side, just hoping to get maybe a little bit of an update as to what youre seeing so far in Q4 and what type of rebound.
You would anticipate to see in Asia as reopening.
Arts to take hold so any updates on that front would be helpful. Thanks.
Doug It's Kevin on Asia, and Youre right. We certainly saw the impacts of Covid during the quarter from both the claims experience in our sales experience side, although we fought through that in our local markets rate we had.
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 economies 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 may 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 of the country.
In 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 werent buying bank assurance products that started to reopen now this quarter and we should see some flows come back backseat rates have gone up significantly.
So many people have only got their first vaccine and so that's just an example, and each market is playing out in its own sort of rates. So we are seeing the economies start backup.
And we are seeing more vaccine rates, but it is early to say what will happen because COVID-19 has taken.
<unk> that have been unexpected.
And maybe Kevin just to kind of finish up with pod.
Yes, but we should be thinking of is more of a gradual one of your peers talked about more of a gradual kind of impact does reopening happens is that is that the way you would kind of think of how we should think of Asia over two.
Through 2020 essentially.
Yes, I do think it's quite different by by market, though right like if you look at China, Hong Kong Theyre focused on opening up the China, Hong Kong border, they've really close that down.
Inside of China.
Been quite open from a kind of movement in flows perspective. So every every country is a little different and the thing to watch I think as 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 rely on a bit of travel where the sales are made primarily through Singapore and Hong Kong at that that is going to take a while to to really open up.
There is still.
Again vaccine rates have to be much higher before theyre going to be fully open to travel.
I appreciate it thank you.
Yeah.
Next question comes from the line of David <unk> from Evercore ISI.
Hi, good morning.
I just had a my first question on the ROE of 16% ROE how much of that is driven by a mix shift to capitalized businesses. A continued mix shift to capitalized capital light businesses versus improving the ROE and the segments that require capital because if I look at 2018 2009.
<unk>, which are cleaner than the last few years.
ROE in the U S and Canada were around 14% 15%.
And around 10% in Asia, So just wondering how youre thinking about.
The source of of getting to that 16% target.
Good morning, David It's managed I mean, I think we're looking at.
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. In addition, we see lots of opportunities for those businesses to work more integrated together and kind of leverage the strong capabilities. We've built across various platforms. So when you put all that together, we feel we feel that the 16% plus Roe.
He is very achievable.
Okay, and then maybe just switching gears to MFS.
Yeah, I just wanted to just.
Talk a bit about.
What was driving the outflows overall I understand the retail flows have been positive for I think it was 11 straight quarters.
But there I guess.
They're they're falling in terms of absolute dollars as well as as a percentage of the beginning of period AUM.
So when I sort of look through it it looks like the redemptions are actually.
Under control and it looks like sales have been you know I guess weaker than what I would've expected. So could you could you just talk about.
I guess the outlook on sales and why sales have been so weak.
Good morning, David It's Mike we're bearish I appreciate the question.
The same themes that we've talked about actually over the last couple of quarters first would be on the institutional side with <unk>.
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 speaks to call out last year was we had such a massive increase in sales out of 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 in active mutual funds have come down and our sales rate has come down in line with the industry. So there's nothing going on.
And our sales that's any different than what we're seeing in the industry.
There's hesitancy as the market makes all time highs in retail to continue to allocate 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 AUM 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'm wondering if that has changed.
Two a similar magnitude as as a percentage that's in the top half of the of their categories.
What we've seen we've definitely you've seen them tuck.
<unk> come down as well and I think I think it speaks to a couple of things. One is I think the performance if you go back.
Pretty unsustainably strong with virtually all of your products are outperforming.
A large percentage of it in the top quartile, what I 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.
Our investment style is generally investing in higher quality businesses with high Roes trading at reasonable valuations.
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's done well.
We think that clients put us on the platforms because they understand our investment process standard they understand when will perform well in the market environments that are more challenged and what we haven't seen is that slight decline in performance have any impact on our relative flows.
Okay.
That's very helpful color. Thank you.
Next question comes from the line of Tom Mackinnon from BMO capital.
Yes, thanks very much good morning.
A question on dividends share buybacks and then a follow up.
With respect to them when we get the Green light here later on this afternoon in terms of the day.
If it ends in share buyback.
And.
Sure.
Looking at our fourth quarter 'twenty, one increase that'd be like over two years since your last dividend increase that we've been running.
The top end of your 8% to 10% yeah.
Our underlying EPS growth objective so.
How does that translate into like a given.
The increased potential with at least.
20% and perhaps even higher just given the fact that youre running lower than your target payout ratio.
Yes.
But if you can talk about share buybacks as well because we're active.
Buying back stock prior to.
Frictions as well right.
Yeah.
Tom It's Kevin.
Take this imagined may jump in but if you look we've got our guidance out there at 40% to 50% of our underlying earnings for the dividend and we've talked about that in the past, but 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 going to do in advance, but but getting back into that 40%, 50% would be our target and we need osophy too.
To allow for that on the buyback our position hasn't changed right, where we deploy capital into our organic growth.
The dividend is our first objective.
And M&A when its there and when M&A, we look at the M&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 M&A pipeline, what's in our organic growth objectives. 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. Thanks.
A question for Dan maybe just as we move into the fourth quarter that seems to be the busy quarter for pricing in stop loss and employee benefits.
What are you seeing here, especially given the fact that you know.
Experience hasn't been as good as would have been anticipated as a result of COVID-19.
Covid, though.
Talk about it.
The outlook for the pricing environment right.
Yes. Thanks, Tom This is Dan it's a.
Great question, because we are of course heading into the quarter were in 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 happened in the third quarter.
But what were the.
Seeing is it a competitive marketplace right now.
And it's somewhat more competitive probably than it has been over the past couple of years. So we're still selling at very high levels. We are leading the industry by a wide margin and stop loss sales. Our sales are up year to date in our group business, which is great.
We are sticking to our pricing targets. So if we have to make tradeoffs it will lead to sacrifice a little bit of volume to.
To maintain our pricing targets and our margins and we are seeing a somewhat heightened level of comp.
Competition at the moment.
Okay. Thanks for that.
Next question comes from the line of Paul Holden from CIBC.
Yeah.
Thank you good morning.
I would just notice that part of your Akamai changes.
This quarter were for a reduction in the best estimate.
Real estate.
So just wondering if you can tie that back to.
What you're seeing.
C.
And the real estate funds you run there.
The continued uncertainty.
Clearly in commercial real estate is impacting.
Demand at all demand and returns of those products.
All of this policy.
I'm just kind of maybe just address the asthma and Steve I'll, let you talk about your experience with Macquarie.
So Paul maybe just a comment we did strengthen the real estate assumption and I do want to specify that the factors that we look at it's a very long term assumption right. So it's kind of a long term through the cycle. So we look at past performance as well as future expectation level of interest rates and risk premium for these types of <unk>.
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.
Water, maybe Stifel and it also can you talk about when you state for the quarter.
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 subsectors, such as cold storage, which had been extremely strong if you look across.
The bto Vitol Greenough funds, there have been overweight sectors like that so actually if you look at the kind of a variety of funds in Europe and North America.
Canada also in.
Our Asia Fund performance has been quite strong in fact, our U S. Core fund had one of the best quarterly returns it's ever had.
The Asia the Asia funds, our head 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 I'm trying to connect it back to the Acme charges. If you look at dental Green Oak 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 our 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're seeing from our investors and the returns have continued to be pretty.
Pretty strong.
That's great and then I just have one additional question relates back to the discussion I just want to verify that.
These lapse assumption changes we've seen.
Over time have really related to legacy product in that.
Newer products being sold is less dependent on lapse assumptions is that is that correct on my part.
Paul That's right. This is Kevin Morrissey the.
Lots of experience that's been negative that we've seen over the last few years as well as the strengthening have all been closed legacy block, it's not related to the new business comes along that's right.
That's great. Thank you.
Next question comes from the line of Jack on the hearing from RBC capital markets.
Hi, Thank you good morning I just.
I realize that the the expense allocation and investment.
Allocation from the par is small.
But.
I just wanted to ask you for a little bit of color on that.
And the reason why I ask because you know typically.
We think we all know the par.
These pass through and never really.
Any sort of.
Ultimate large risk but.
But I guess, you've pulled seed money out of it before and so now I'm wondering is this sort of an asymmetric risk.
Sort of going forward from now on.
The only thing that can happen is potentially.
An allocation like this that could affect the company's future and you continue to sell I understand a lot of par policies, which will only make this a bigger as time goes on can you maybe just touch on that.
Just to sort of assure us that.
Those small the prospect of possible future.
Reallocations like this really wont happen and affect a affect you.
Hi, Darko.
Kevin Thanks for that question.
So this was not a cost.
Associated with the risk of the part of policyholders in the past. This was a one time prior period adjustments and it was really refinement to pre 2016 allocation of investment income and expenses between par and shareholders.
So the structure of the gene neutralization agreement resulted in a 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 out this quarter and that cost to the shareholders of about $85 million about half of that.
Just adjustments to the prior period allocations.
That was interest accrued to bring back.
Current quarter and those allocation adjustments happen between 2008 and 2016 since some time ago.
Quite complicated and it's related to the accounting changes back in 2007, and the interaction with the G. Mutualization par account structure. So there is no impact to future.
Earnings and I'd say this isn't something that's likely to occur.
Again.
It really is not related at all to the profile of the products in the past and features of the products that we're selling more.
Okay. Thank you.
Yeah.
Next question comes from the line of Nigel D'souza from Fairtest 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 India.
In Asia, the Philippines, and India I was wondering if you could provide more color on the trends youre seeing for mortality related to COVID-19.
Your insured population versus the general population and whether or not you expect that unfavorable mortality experience too.
Continuing to persist at least in the short term.
It's Kevin.
Kevin Nigel Yes, we saw heavy COVID-19 death rates in the countries, where the vaccine rates were lower that we talked about earlier and where the Delta variant was more prevalent. So you are 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 need.
That's the most what we're looking at is vaccination rates in the improvement in vaccination rates in those countries and that's what's going to really help they continue to see social distancing and masking across Asia vaccine rates going up I think our experience would be roughly in line with what you were seeing in the countries you were seeing higher mortality rates in India.
In Indonesia, and the Philippines, So that's that.
It's really difficult to say as I answered earlier, what's going to happen from a from a claims perspective with new variants and the fact is that they're not at the vaccine rates that we are today. So.
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 countries. In fact, we're helping our.
Our employees get vaccines and many of those jurisdictions.
That's helpful and 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.
Looking towards the vaccination.
Programs, you are rolling out a more equitable vaccine distribution as kind of light at the end of the tunnel for me.
Mortality.
Risks.
Yes, I think if you look longer term the Asia is going to end up getting two vaccine rates like you see in other places and so that's going to certainly help in yes.
Yes, we are seeing even a little bit of curbing up the amount of deaths this quarter I'm just.
Things can change the variance can change and those types of things, but it's really not changing our our commitment and our purpose in those markets.
And if I could then on a broader question on your inflation and interest rate XP.
Our expectations are you expecting a persistently low rate environment or a rising rate environment and the reason I asked that is does that impact. The way you look at your business mix. So if we 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 you have a rising rate environment that the danger of PREPA.
To have a higher growth in the insurance business or do you even think about interest rates and business mix could you perhaps elaborate.
I might start and that Randy talked about are how we're thinking about inflation you've got a good look at our sensitivities in 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've worked in a low interest rate environment for a long time now and we've really gear.
Our businesses towards that that's adding SLC has been helpful. On that front MFS has obviously benefited from higher equity market results that also have a relation to lower interest rates, but rising interest rates aren't a bad thing for the insurance industry as they rise on a sustainable basis. So we think we're we're quite well positioned.
The diversity of our business the mix of our business. The fact that were lowered 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 I'm happy to this is Randy Nigel so unemployed and we've had the view.
Several years now that we think that inflation will be less transitory then central banks, who are trying to portray so we're seeing both supply and demand side inflation creeping into the system.
And.
Paresh.
The transitory we think is more measured in several years than months and I think the central banks are coming around to that view so.
What you heard from us in Investor Day.
Is that given the Neal the.
Negative nominal in real rates of return available in high quality fixed income.
We have done a <unk>.
Moderate, but a shift in our portfolio to non fixed income.
And in particular real estate has noted.
Which will do well in a moderately inflationary environment. So we don't see inflation being run away.
Any means but we do think central banks.
Going to err on the side of letting inflation be a little bit high.
For longer.
To move away from that deflationary edge that theres still worried about so.
Thank you.
Yes, that's really helpful color. Thanks.
Next question comes from the line of Slim offers from.
From Cormack Securities.
Yeah.
Thank you. So there is some discussion already on the trajectory of the recovery from Covid in Asia. I was just wondering if if it's going to be the same in the U S. It sounds like you're suggesting there's going to be more gradual earnings recovery in Asia is that how we should be thinking of the U S. R.
Simple availability of vaccination suggest a faster recovery.
U S versus Asia.
Well. Thanks. This is Dan let me take that for the U S portion.
I think what's important to look at the overall statistics and deaths in the U S. In the Delta variance 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 23 deaths have come down on a seven day average about 40% in the U S. We're certainly hope.
Full that they'll continue to come down but of course, that's very hard to predict so we would expect that.
Our own experience, we will start to moderate.
System with what's happening in the broader population.
Okay. That's helpful.
And then.
I guess and then.
On slide six you guys show the business mix and how that's shifting away from traditional insurance wealth and group and 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 the businesses that have less of the sort of traditional insurance loan loan duration more guarantees so I'd expect that over time.
That would trend down a little bit but it's.
It depends on a lot of factors.
Okay. Thanks, that's it for me.
Next question comes from the line of Scott Chan from Canaccord Genuity.
Thanks.
Thanks, a lot Kevin you talked about.
Near term capital priorities.
Panic and dividends and then you've mentioned in Seattle.
And on your M&A pipeline. So I'm just wondering what the M&A pipeline is now say versus pre pandemic.
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. We're in I would point out we really talked about it I mentioned it in my strategic objectives that we have a programming approach to M&A and if you look at the last few years.
Ours through Covid, we've done 10 different M&A transactions and they have spanned across all four pillars things like dent to quest in clinical care in the U S.
Bancassurance transaction in Vietnam, the Crescent and infrared transaction and Steve's 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 were able to add either scale or capabilities, we had confidence in our ability to execute and they met our medium term objectives. So when we look at the when we look at the pipeline. It is about achieving those those things.
That's that changes over time and you know at this point, we did we've done the <unk> acquisition that was a big one but there is always something going on around the world and the Sun life World in and we look for those things can we.
We will build our medium term objective is it on strategy and can we execute on it.
Got it and lots of maybe for you Kevin as well you talked about.
Our key priorities on slide four and I'm, one of them being realizing synergies.
Between asset management and insurance businesses and maybe this ties into your 16% plus ROE target, but perhaps could you elaborate.
On the synergies and maybe some more revenue or cost focused.
Yes. This is one of the reasons, we were able to build out <unk> successfully right. Because we had this this insurance business that provides cash flow.
On a regular basis provide asset opportunities provide seed capital and SLC was able to step in and provide returns and duration and long duration assets.
Is this this continuing to leverage the synergies between asset management and insurance looking for them I'll give you. Another example, we built out the defined benefit solutions business as part of <unk>, where we had an expertise in mortality we have an expertise in longevity with the ability to compete from a liability standpoint here, but we.
Neither of these long duration assets to support that and that's what we were able to build out in <unk>. So it's really about looking for and making sure. We're uncovering all of the opportunities to drive that efficiency and that synergy between the asset management and the insurance business.
That's helpful. Thanks, a lot.
Okay.
We have no further questions at this time I would now turn to Mr. Bennett for closing remarks.
I would like to thank all of our participants today 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 conference call. Thank you for participating you may now disconnect.
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