Q4 2021 Sun Life Financial Inc Earnings Call
Secret is ready to begin.
Ratings right now thank you don't change for yield.
And then I'll give my introduction.
You can please transfers over to the call and beat music.
Okay.
Good morning to everyone. My name is Justin and I will be your conference operator today at this time I would like to welcome everyone to Sun Life Financial Q4, 2021 financial results Conference call.
All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
Most of the call.
Bidden, Vice President head of Investor Relations and capital markets. Please go ahead Mr. Burton.
Thank you Justin and good morning, everyone.
Welcome to Sun Life's earnings call for the fourth quarter of 2021 are.
Our earnings release and the slides for today's call are available on the Investor Relations section of our website at Sun life Dot com.
We will begin today's call with an overview of the fourth quarter and full year results from 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 their prepared remarks, we will move to the question and answer portion of the call.
Other members of management will also be available to answer your questions. This morning.
Turning to slide two I draw your attention to the cautionary language regarding the use of forward looking statements and non <unk> financial measures, which form part of today's remarks.
As noted in the slides forward looking statements may be rendered inaccurate by subsequent events.
I'll now turn things over to Kevin.
Thank you Steve turning to slide four we delivered solid fourth quarter results with reported net income up 45% to approximately $1 1 billion and underlying net income up 4% to $898 million growth in underlying net income was strong across asset management in Asia, both up 18% on a constant currency.
Fee basis, and also in Canada, which was up 9% over the prior year U S. Underlying earnings were down approximately 50%, mostly reflecting adverse COVID-19 mortality experience U S infection and mortality rates related to COVID-19 remained elevated and as a result, we continue to see significantly higher than expected mortality.
In the working age population, we also saw elevated mortality in Asia, mostly in the Philippines.
Our capital position remains strong ended the year at 145% like cat for Sos and cash at the holding company of $4 7 billion.
November following the lift of regulatory restrictions for all federally regulated institutions, we announced a 20% increase to our commentary dividend reinforcing our commitment to provide strong returns to shareholders turning to slide five we had strong full year results in 2021 closing the year.
Reported net income up 64% to $3 9 billion.
Driven by favorable market related impacts and a $297 million gain on the IPO of our India asset management joint venture underlying net income was up 10% to $3 5 billion.
At the high end of our medium term objective of 8% to 10% growth 2021 underlying ROE of 15, 4% was also strong moving towards our 60% plus medium term objective.
And we ended the year with $1 four trillion in assets under management.
Also had strong growth across our businesses in 2021, SLC management had $32 5 billion of net inflows in the year and MFS ended the year with record AUM of U S $693 billion.
Individual insurance sales grew 36% in Canada and U S group benefits sales grew 13% in constant currency sales in Asia were strong outside of international hubs and total Asia wealth sales were up 51% in constant currency. These results were achieved while managing through profound impacts from the COVID-19 pandemic since the start of the <unk>.
Pandemic, we've paid almost $900 million in Covid related claims.
To be there for our clients when they needed us. The most the pandemic has also had significant impacts on mental health and we continue to identify ways to help our clients and our people worked through these issues. We also demonstrated resilience through lockdowns and movement restrictions in the various geographies that we do business and we are constantly innovating to bring new digital solutions.
As to our clients and of course, the pandemic is not over as Omar Khan spreads around the world. We continue to see higher Covid incident rates and unfortunately in cases, where vaccine rates are lower we are also seeing continued mortality. The pandemic has also disrupted supply chains and drove unprecedented stimulus from governments. These factors.
Others are driver are driving higher inflation rates, our diversified business mix is well suited to manage in an inflationary environment through continued business growth disciplined expense management and pricing actions.
Inflation is also is also usually followed with higher interest rates steadily rising interest rates, particularly at the long end of the curve are good for insurers and should provide profitability support over the medium term.
Turning to slide six our purpose is more important now than it has ever been people are focused on their health and long term financial security like never before this quarter. We delivered on key elements of our strategy MFS maintained strong performance for clients with 97%, 96% and 80% of Mfs's U S retail mutual funds.
Assets ranked in the top half of their Morningstar categories based on 10, five and three year performance, respectively, Canada continued to deliver on health outcomes, expanding our partnership with cloud MD to help clients manage their mental health with our new mental health coach. Many contained Canadians continue to struggle with mental health yet at Sun life.
Suddenly study found that over half are not seeking care crowd MD and our mental health coach use data analytics to identify at risk clients and proactively reaches out to guide them to the right resources and support.
In the U S. We continue to enhance our digital capabilities to make it easier for clients to get the benefits. They need in 2021 to support supported record U S group benefits sales of U S $1 $2 billion in Asia, we are delivering on distribution excellence, where bancassurance sales in Vietnam have more than tripled compared to the prior year.
While continuing to invest in health solutions like Bowtie, Hong Kong first digital insurer positioning it to expand across Asia.
Sustainability is an imperative for sunlight and 2021 was a pivotal year for us we achieved carbon neutrality across our global operations and for the 13th consecutive year sunlight was recognized among the global 100, most sustainable corporations in the world sharing the number one position among insurance companies globally.
Video is a great example of the tightening of the investments we are making in sustainability Biggio was recently awarded the 2021 outstanding building of the year Award for industry leadership and excellence in building management weighted to one of our retail and office complexes in Toronto. This 10 story building uses state of the art artificial intelligence analytics.
That generated energy savings equivalent to the annual energy use of 442, North American homes. It also reduced carbon emissions by approximately $3 8 million kilograms over the course of 2020.
Finally sunlight was recently certified as a great place to work in Canada, and the U S, adding to our previous certifications in the Philippines, and our Asia Service Center in India.
Turning to slide seven digital leadership is a key priority for sunlight and we continue to shift the organization to think and act like a digital company. Our digital strategy is centered on three areas digital experiences digital.
Capabilities and digital ways of working in Canada, our digital coach Ella continues to deliver meaningful outcomes for our clients driving nearly $700 million in additional wealth deposits and $950 million in insurance coverage sold this year.
This is another example of how we're helping Canadians safe for their future and ensure their families and loved ones have the protection and financial security they need in.
In the U S. We launched Sun life link a broad portfolio of digital connection solutions to enable easier interactions with plan sponsors, reducing manual work and increasing operational efficiencies, allowing players to spend more time on things that matter to their employees.
Digital adoption is also a focus in Asia with 71% of new business applications submitted digitally in 2021 up 48 percentage points compared to the prior year.
We're making it easier for clients to do business with us, especially during times, where face to face connections are more difficult.
We are empowering our people to support the digital journey by providing flexibility through a hybrid work model and increasing the number of agile practitioners by 63% over last year.
These are just some of the ways, we continue advancing digital experiences and capabilities across our businesses and we will be sharing more on our progress throughout the year finally, reflecting on this past year in my first six months as CEO I'm extremely proud of what we've accomplished we are well positioned for growth and we have a clear compelling strategy with a.
Strong track record of execution.
We continued to effectively manage capital with over 10 strategic transactions in 2021, including the acquisition of Pellicle care. The IPO of our India asset management joint venture and our intention to purchase 10 to quest.
And we remain committed to our purpose and to creating positive financial and health outcomes for our clients also want to thank all of our employees and advisers around the world for everything they have done this year to help our clients achieve lifetime financial security and live healthier lives with that I will now turn the call over to manager who will take us through the fourth quarter financial.
Alright, well, thank you Kevin and good morning, everyone. Slide nine provides an overview of our fourth quarter results. The results once again demonstrate the resilience of our diversified business model.
Our wealth and asset and asset management businesses delivered strong results driven by good net flows and favorable market conditions.
On the protection side fundamental business activity was strong while COVID-19 related mortality and morbidity experience remained elevated in the quarter.
Reported net income in the quarter was nearly $1 1 billion.
This included higher investment property valuations, reflecting the value of our investment team has created from repositioning the portfolio over the past few years.
Reported net income also included a $297 million gain from the IPO of our India asset management joint venture.
This was partially offset by an increase to acquisition related liabilities of SLC management, largely reflecting higher expected earnings at the time of buyout of the remaining interest in affiliates.
Underlying net income of $898 million and underlying earnings.
Earnings per share of $1 53 increased 4% driven by broad based growth across our business groups corporate.
COVID-19 related impacts of approximately $110 million a quarter was largely offset by a lower effective tax rate, reflecting higher tax exempt income and the release of a tax provision on resolution of prior year's tax matters.
Underlying return on equity is 15% in the quarter and 15, 4% for the full year, marking the first time, our underlying ROE is cross 15% on a full year basis.
Assets under management grew to over one four trillion, reflecting market value growth and another strong quarter of net flows in SLC management for the year SLC management management assets under management were up nearly $70 billion driven by strong net flows and the Crescent acquisition.
Our wealth and asset management businesses in Canada, and Asia also delivered strong AUR growth up $14 billion from the prior year.
Book value per share increased 8% over the prior year, excluding impacts in other comprehensive income book value per share was up 12%.
Our capital position remains strong with like cat ratios of 145% at <unk> and 124% at SLA.
The financial leverage ratio increased to 25, 5% and cash at the holding company increased to $4 7 billion, both reflecting the 2 billion subordinated debt offering we did in the quarter.
Slide 10 outlines the performance of our business groups.
Asset management reported net income of $140 million was down from the prior year, reflecting a 153 million charge for SLC management acquisition related liabilities the.
The increase in the liability largely reflects higher growth expectations. Accordingly, we are increasing our investor day target for 2025 underlying net income by approximately $10 million to $235 million.
Asset management delivered record underlying net income of $382 million driven by a 14% increase at MFS and an 18% increase in SLC management.
Canada's reported net income of $356 million was driven by higher real estate valuations and equity market growth.
Underlying net income of $266 million was up 9%, reflecting strong expected profit growth and favorable expense experience.
This was partially offset by $20 million investment impairment and unfavorable disability experience.
U S reported net income of <unk> $68 million was up slightly from the prior year as gains on real estate investments are mostly offset by lower underlying net income.
Underlying net income of EUR $66 million was down from U S $112 million in the prior year.
The fourth quarter results included $66 million of COVID-19 related impacts as the working age population infections and mortality remained elevated we expect pandemic related headwinds to persist for the first quarter of 2022.
That being said the core fundamentals of the U S group business are strong we have maintained high persistency level and are generating good premiums growth, we've enhanced our product and digital capabilities pricing for new business remains firm and we have added key talent to support our growth strategy.
In Asia reported net income was $446 million, which includes the gain from the India asset management IPO.
Underlying net income of $130 million was up 18% on a constant currency basis.
While we continue to face challenging conditions in some markets overall business fundamentals were strong.
Total expected profit and new business gains were up 20% on a constant currency basis.
This was partially offset by $12 million of COVID-19 related experience primarily in the Philippines.
Reported and underlying net income in corporate are both up driven by a lower effective tax rate in the quarter, partially offset by higher expenses.
On Slide 11, we included an updated view of our sources of earnings reflecting two changes we made to provide more meaningful information. We've included the sources of earnings and underlying net income basis, and we've reflected the asset management pillar on a separate line in our sources of earnings.
Expected profit increased 6% on a constant currency basis, reflecting business growth and market driven gains, notably Canada expected profit grew 9% and Asia expected profit grew 14% in constant currency.
Experience gains on a reported basis improved by $126 million driven by favorable market impacts that are partially offset by experienced losses.
On an underlying basis hire experienced losses were primarily driven by COVID-19 related mortality and morbidity earned.
Earnings on surplus was down from the prior year, driven by lower <unk> and seed investment gains.
Slide 12 outlines insurance and wealth sales on a constant currency basis.
Insurance sales were up 16%, primarily from our primarily driven by a 26% increase in U S group benefits sales.
Fourth quarter is an important sales period for the U S business and we're very pleased with our record sales results for the quarter.
Canada individual insurance sales were also strong increasing 36% from the prior year.
Asia, our local markets individual insurance sales grew 23% in constant currency with double digit growth across most markets.
And while international hub sales declined from the prior year, we have good momentum in our sales pipeline heading into 2022.
While sales increased 13% on a constant currency basis, driven by higher defined benefit solution sales in Canada, and higher while sales in the Philippines and India.
Asset management gross flows were up 12%.
Management delivered strong net flows of $9 7 billion MFS had U S. $1 2 billion of net outflows as retail inflows were offset by institutional outflows.
<unk> of new business generated in the fourth quarter was up 19% on a constant currency basis, reflecting strong sales and higher margins across most businesses.
Turning to slide 13, which outlines our 2021 full year progress on medium term objectives as well as a five year view.
We are pleased with our 2021 results, especially in a year, where we had to manage through pandemic related challenges across our geographies the.
The combination of our diversified business mix and global footprint allowed us to effectively navigate through a more challenging operating environment to deliver impactful health and financial outcomes for our clients.
As we look ahead to 2022 and beyond we are well positioned to build on our strong track record of performance supported by our Premier asset management franchises at MFS, and SLC management, leading wealth and insurance insurance market positions in Canada.
Shifting towards more capital light businesses in the U S and an established presence in attractive markets in Asia.
And our strong capital position allows us to pursue attractive growth opportunities and provide strong returns for shareholders.
That I will turn the call back to <unk> for a question and answer period.
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 yourselves to one or two questions and then re queue with any additional questions I will allow us Justin to poll the participants.
Thank you as a reminder to ask a question Youll need to press star one on your telephone to Joel Your question press the pound key please standby, while we compile the Q&A roster.
And our first question comes from Humphrey Lee from Dowling <unk> Partners. Your line is now open.
Good morning, and thank you for taking my questions.
I guess my first question is on U S group benefits underwriting results.
The drum that normalization of stop loss claims experience was a little bit over what was a big surprise to me, especially since all the stop loss players steelhead relatively favorable performance can.
Can you just talk a little more in terms of your stop loss underwriting and compare that to the favorability that we've seen in previous quarters.
Yes. Thanks Humphrey this is Dan fishbein.
Continue to have favorable stop loss results in the fourth quarter. What we've seen is a gradual wearing off of the favorable impact that we were seeing from the.
The slowdown in reductions in care during the pandemic as you know those were very significant both in 2020 in the first half of the year and in the third and fourth quarters. We've returned largely to normal hospital utilization, which then starts to impact the stop loss results I would like to stop loss results actually.
Remain favorable.
We have estimated that about 60% of the favorable stop loss results. We've seen during the year were due to the delays in care due to COVID-19 , but 40% was due to favorable underwriting and pricing results and those continue and continued in the fourth quarter.
So just to kind of thinking more like for this quarter's results.
Since you don't provide the underlying net income for group benefits, but just thinking about on a net income basis, the $9 million versus the $50 million last quarter is that delta just the.
Yes.
D D.
Covid claims was also a little bit more unfavorable as the Delta just seemed like the normalization of the stop loss.
Running through the numbers.
The Delta was essentially entirely or almost entirely the COVID-19 claims.
We've indicated that we experienced $66 million in the fourth quarter.
Unfavorable COVID-19 claims mostly mortality some disability as well.
So the difference between the fourth quarter in the third quarter is largely due to COVID-19 .
Covid clay.
Claims.
Sure.
If we think about what's been happening in the U S. During the third quarter.
Quarter, and especially the fourth quarter, we were experiencing the delta variant.
Which was quite severe in terms of mortality.
And now we've begun very late in the fourth quarter and into the first quarter experiencing the <unk> variant, which is less severe but far far more contagious and more comment. So I think what you're seeing playing out here is the overall population mortality in the U S from Covid.
Each has in the second half of the year migrated much more into the working age population, whereas earlier in the pandemic. It was largely in the above 65 population.
But for the first quarter corporate <unk> was it like $50 million U S.
So it is not a big increase from four for Q2 from <unk>.
I believe our COVID-19 mortality and morbidity that we reported in the third quarter was $27 million.
But and that May.
It's significantly higher though in the fourth quarter and that follows the incidence of deaths. Unfortunately in the U S. In those time periods.
Okay alright, thank you.
Okay.
And thank you.
Next question comes from Gabriel Deschaine.
From National Bank financial.
Your line is now open.
Thank you.
I'm more curious about the outlook you talked on the peripheral of the U S group business in Canada, as well for that matter, but.
I see.
Some headwinds, but may appear transient like the mortality rates from COVID-19.
Ill.
Hopefully transient anyway.
But they may be replaced by other issues like mental health claims and medical cost inflation.
And.
Just wondering how you see those trends evolving over the next year really so that's about all of them.
This quarter was particularly weak, but there is no problem.
One is on the horizon for the group business, but we have not really fully seen yet.
Or.
We do thank you all right.
So all these things coming you price for it.
<unk> see an impact.
Canada and Europe .
Yeah.
Dan do you want to start with the U S. And then maybe John can talk about the Canadian group.
Group benefits business sure sure.
So very good question as to what.
Second order impacts may be.
In the U S.
Are not as exposed to mental health claims.
Our stop loss business of course, you remember what that business is very large claims generally above in a catastrophic kind of threshold.
Those are typically not where our mental health claims would fall mental health certainly have an impact on our disability business on the morbidity.
But in the U S environment, which is quite different in Canada mental health benefits and disability are limited to a two year term.
So while we may see some claims.
In that category the reserve impact because we of course set up a reserve based on the expected duration of the claim.
Our much smaller there were obviously very concerned about that issue for our members and we've put additional.
Capability in place to help members in these difficult times, especially because of our disability business with return to work, including looking at alternative approaches which are now more feasible in this.
More virtual work environment at least for for many roles.
So we have more tools at our disposal to manage that but again I think the impact in the U S.
As more modest simply because of the products that we are offering.
We had a motorola.
Right.
What about medical cost inflation.
Your convert.
Medical cost inflation would potentially impact our stop loss business. That's the one area that it could impact.
<unk> business is fully re prices every year and when we set our pricing factories, we take expected medical cost inflation into account and we actually work with.
Leading actuarial consulting firms to project medical inflation, which is pretty.
Widely shared number in the U S of course, amongst the health insurers as well and public sources.
So we priced prospectively for medical trend.
And we would have that in our pricing going forward and if for some reason that that expectation was incorrect, we would be able to react very quickly as the business re prices each year in fact, I mean, not that we're hoping for medical inflation, but.
The primary impact for medical inflation on our stop loss business would be more premium.
Okay.
I'm sorry, no that's okay.
So the situation in Canada as you probably know.
Different from what Dan is experiencing Covid is actually not have a material impact on our mortality here.
And as you probably know.
There is a bit of a natural hedge.
And the Canadian business, because we also have a large annuity block.
The rental part is an issue and you addressed that before but let me give you a bit more context. This time around you might recall, we see we saw an increase in mental health Jason.
Visibility actually from a number of years before Covid, that's accentuated through Covid.
Starting in May 2019, we started putting some price increases through the Balkan in fact.
We've done 97% of it we think we're in a good place.
The incidence of visibility is in line with what we expect from the pricing.
But the issue is at the moment is actually getting people back to work.
Every time toward variable.
Cherilyn.
And that is in part driven by Covid.
People need access to care and access to care has been an issue during COVID-19 .
So we actually think when it comes to morbidity in Canada, we're in the right place in terms of pricing.
And the return to work aspect of it.
That is in fact, something thats more transient.
Okay.
Okay. So duration on your price for some of these trends in Canada, but the one that might be a little bit.
Uncertain now as the duration of claim.
Yes and Youtube.
And as you know, it's well known.
Access to care problem.
Turning program, but we expect that our Cologuard, we seed this will come back at home.
Okay.
Thank you.
Thank you and our next question comes from David multi Madam.
From Evercore. Your line is now open.
Hey, good morning.
Kevin I'm wondering if you could just talk about how youre thinking about share repurchases now.
And maybe putting another NCI be out there now that now that it's allowed.
Yeah. Thanks, Thanks, David.
As you can see from the quarterly results were in a strong capital position, but we do have the dent to quest acquisition, that's coming up we expect that.
To close in the May June timeframe still in.
That will be using about $2 $6 billion of use of cash and capital what we do with the NCI B as we we look at opportunities for.
M&A activity to support growth and building capabilities.
At our capital position, so we'll be assessing that as we get closer to the back half of the year in and get the <unk> acquisition closed. So it is a matter of looking sort of at our at our pipeline. We're pretty we're still pretty active you would've thought in my opening remarks that we did 10 strategic.
Content and strategic initiatives in 2021, and we've got lots that we see on the go and lots of opportunity to invest in our businesses. So it's a balance of those two things.
And we'll be assessing that as we get closer to the back half of the year.
Okay, great. Thanks for that.
And then maybe a question.
Just on cash flow free cash flow.
Where did that come in for the year I think last year, we were talking about an $800 million level net of the dividend.
I guess, obviously COVID-19 has an impact this year, but maybe just talk about what what you think free cash flow was this year and the outlook going forward given growth in the underlying businesses.
Yeah, Hi, David Good morning, Thank you for your questions management.
We've sort of outlined the $800 million of referencing as sort of a.
Capital generation remained over the medium term and 2021 were broadly in line with that and given the mix of our businesses and our growth potential we expect to be in that range going forward.
Okay.
Got it and.
And I guess why hasn't that grown I think the last time you first gave that I believe it was 2019 I mean, obviously COVID-19 is a headwind, but the underlying earnings have grown.
Since 2019, despite the headwind from Covid. So just wondering why the free cash flow generation Hasnt increased.
I think theres a couple of things so number one as Kevin mentioned, we're continuing to invest organically in our businesses.
And looking at some of the opportunities we have there and then obviously there has been some market impact.
As we've seen changes in some of the market factors like interest rates.
And like I said, the eight hundreds kind of a medium term target over a cycle.
Okay. Thank you.
And thank you and our next question comes from Tom Mackinnon.
From BMO capital Your line is now open.
Yes, thanks, very much and good morning.
A question for Dan here.
Fourth quarter is a big time for.
Yes.
New business activity in U S group business than you had 26% growth.
The sales there so.
On one end Youre growing your sales 26% of them together and you are experiencing higher than expected mortality claims.
Both in the same quarter.
Maybe you can help us.
Yes.
Go through here.
Explain your thought process in terms of pricing.
<unk> group came up for renewal did you.
I'm trying to what.
To what extent are you re pricing in this elevated mortality.
Hum.
How much.
All of this elevated mortality.
It could go away through the pricing.
Yes. Thanks, Tom This is Dan so.
First of all the increase in sales in the fourth quarter, which as you noted was substantial was mostly in our stop loss business. So we had we had strong sales results in the group business as well, but largely consistent with the prior year.
The increase was mostly in stop loss.
And the dynamics there is that we saw a much more rational pricing environment emerge in the fourth quarter, especially in the last two months of the fourth quarter, which of course are the two biggest sales months of the year because most of that business is on a one one.
Renewal and sales cycle.
So our very strong stop loss products and team.
Really carried the day in the fourth quarter.
Earlier irrational pricing quite frankly that we had seen earlier in the year.
Largely evaporated in the fourth quarter. So we ended up finishing the year very very strong and having a nice strong close ratio, especially in those last two months and so that bodes well for us.
This year, because we've had some nice business growth in the stop loss business. Your comment of course pricing is related specifically to the group life business and a.
Of course that is COVID-19 driven in fact, we believe that.
Highly COVID-19 driven.
So we are not pricing fully for the current COVID-19 mortality, because thats not expected to persist long term. However, we have taken pricing actions some of which occurred in the fourth quarter too.
To adjust our both our group life and our disability pricing upward to reflect what we think will be some long term elevated experience and we observed that in the marketplace.
Entire marketplace appears to have moved.
Modestly upward in the fourth quarter and moving into the first quarter I would.
Point out as we've talked about in the past that.
Pricing changes don't click in immediately most business on the group side as opposed to the stop loss side is on two and three year contracts.
So it does take a while for those price increases to cycle through the book of business.
Okay. Thanks, and then for the second question.
You've had really good sales growth.
Yes.
Our national hub.
And this is the first time.
Correct me, if I'm wrong, but pretty good new business wins in Asia.
No.
What is happening here.
Coming more to scale.
Is it more profitable.
Why and how.
How should we be looking at new business.
When you say going forward is what we saw in the first quarter, an anomaly or the fourth quarter, an anomaly or.
Youre welcome.
Before I conclude.
Is it going forward.
Tom It's Kevin <unk> on the call. This quarter. She is on the ground in Hong Kong now and so I'm going to turn that question to Ingrid.
Okay.
Kevin Thanks very much.
Good morning.
It's a little bit faster and I think as it gets.
Question overall into paint line.
The new business gains we've done a tremendous FX next year.
Okay profitability, ensuring we're asking quality sales.
While you're exiting some of the trend line.
A little bit irregular kind of that has been part of the D. C. Interestingly on the local market no Becca.
Becca, it's noncore to the.
This past quarter four has actually been out there in the.
It's nine and then if you look at the international hub is next to Dean.
Sure.
And the main Tim Thanks.
Quarterly probably.
Angel.
First quarter, so we are seeing that coming through.
John rebuild.
You should look at the expected profit.
Is the line, which the line with me.
And we do remain optimistic.
Clearly, there's some uncertainty around travel restrictions and the implications of the any cost virus.
Evelyn funds.
Ethane.
Chiller sales.
We remain cautious of it.
We also need to see the indications with privacy.
Tom It's Kevin I might just note that we've been of course investing in distribution for a number of years now.
In Asia, we see that the ASEAN countries, the Philippines, Vietnam, Indonesia, Malaysia, with this growing middle class as being a great opportunity where of course number one in the Philippines. We have a very strong agency force there and a good bancassurance relationship.
We've grown significantly in Vietnam. This year, we did a bancassurance transaction with ACB last year, and then one day here before with TD Bank. So we are well positioned on the banker side and we've got a nice agency Thats continues to grow in a new CEO . There. So I am quite excited about Vietnam, and Indonesia, we saw really strong results.
We've got some good banking relationships there San Diego's one and we've got.
A good strong agency for us and continue to see growth there in Malaysia.
We've got a relationship with <unk> in Malaysia, and are building out our high quality Agency force there as well and then of course, China and India are seeing the growth related to the emerging middle class as well so thats why youre seeing strong results. There I think I think inc.
<unk> point around Covid is a good one though because.
Covid impacted at different times in different ways across those those countries and so it's really a question of country by country. As you think about the Covid, but I would say overall our investments in distribution are paying off and Thats, what youre seeing in the results this quarter, particularly with the emergence of the middle class.
Okay.
Is it takeaway that the new business gains that you've got in the quarter and Alicia.
We expect those things.
We continue or it could be.
Better than.
New business losses that you've traditionally had in Asia is that the takeaway.
I think Tom you are right that the scale is the scale is helpful. In Asia, because it controls the expenses the bigger your distribution channel and also the work we've done on the mix of business that Ingrid discussed earlier. So the combination of both of those is what youre seeing in the results.
Hey, Bill I do like the asset.
Disclosures thanks for that.
Yeah Youre welcome Todd.
And then is more variable.
Yes.
Okay.
It will be variable in the quarter.
Thank you and our next question comes from Doug Young from the Jarden markets. Your line is now open.
Hi, Good morning, So just back to you Dan the question I guess, if I'm getting a lot of it is on the U S group business and I think you've answered a lot of the questions, but maybe I'll just throw this out there.
The question is is the policyholder experience that you're seeing.
Whether it's stop loss or in the employee benefit side do you see this as transitory you see at Morris permanent.
And why and how do you feel about being able to achieve that 7% plus margin.
On your group side that you've thrown out that you've obviously been in excess of that is that margin still realistic given the pressures that youre seeing.
Yes, Thanks, Doug.
Great questions.
I think theres a number of different pieces there to go through so first of all on the stop loss experience as I said earlier, we think that about 60% of the favorable experience.
In.
2021 was from the impact of delays in care due to COVID-19 , but about 40% of it was due to ongoing just really strong underwriting results. So in the fourth quarter utilization return and this is based on overall population statistics as well as what we see in our book of business.
Utilization returned very close.
Normal so it's that underlying part of favorable experience that we would expect to continue.
But the.
The tailwind from delays in care would not know I should caveat that.
Was a period of time, especially in January in the first quarter, where there were hospitals, where very overburden thankfully getting a little better better now so we might see some anomalies in the pattern versus a straight linear.
Back to complete normal utilization as far as the mortality what we experienced in the fourth quarter was if you look at loss ratios or mortality as a percent.
Relative portion of the book of business, our experience was middle of the pack compared to peer companies in the U S. So nothing unusual in our book of business, obviously, though very unusual in that we are having a once in a century pandemic.
As you know with both the Delta variance in the fall and then the omicron variant extending into January and February we are in a very difficult part of the pandemic at the same time things are starting to get better case loads hospitalizations and now even deaths are starting to fall nationwide.
So our belief and our hope but of course, we can't predict what will happen, especially with the emergence of new variants.
But barring another dramatic new variant, we would expect the COVID-19 impacts to subside. After the first quarter, there will still be significant impacts in the first quarter, but.
But we're hoping that we get to a much more.
And that kind of level of impact.
Beyond the first quarter.
And just around the margin.
Yes on the margin. Thanks. Thank you.
Yes.
The margin obviously, it peaked at around 8%, which was actually well above our target remember, it's a trailing 12 months measure so we'd have to look back at all four quarters and it will take a while for the COVID-19 impacts to fully wear off.
Yes.
I will say the group business is actually in the best condition that its ever been in.
With the exception of very notable exception of the Covid mortality, but it's obviously hard to see through the fog of that right now, but in terms of where we are on pricing on sales momentum on growth in the book of business.
On persistency.
On products that we've put in the market new digital capabilities I can sincerely say that business has never been in better condition than it is now so as the COVID-19 impacts fade, which hopefully they will we should.
Should see the group business as a significant source of earnings growth in the U S. As its underlying earned.
Earnings power re emerges.
One other comment just on the margin.
Dental business, which will become a very big part of our business. When <unk> closes is by its nature, a somewhat lower margin business.
Because they require it's a business that requires very little capital.
So lower margins generate very strong return on equity so thats the nature of that business. So we are thinking about.
Is is margin in the current target that we have out there the right metric going forward considering the role that <unk> will play in our total book of business going forward.
No that's good color and then just.
My second question I don't know if he's on the line, but just on SLC net inflows $10 billion in the quarter.
Just wanted to get a little color of what you're seeing from a flow perspective, and obviously it sounds like you increased your earnings target.
For 2025 by $10 million to $2 35, just trying to get a sense of what to what.
What drove that increase and is there is there more yes.
More gas in the tank on that side.
Yes, Hi, Doug it's Steve Thanks for the question, Yes, we feel like we're seeing really good momentum in the business and one of the things that I feel really good about in the.
Our fundraising for the fourth quarter, but also for the full year is the diversity of those flows we're seeing.
Growth across the platform.
I think in the fourth quarter for instance.
So that that number includes over $1 billion for Crescent mezzanine fund almost $1 billion for European Real estate fund VGL almost over half a billion for a cold storage real estate fund.
$500 million for our private fixed income business in the U S almost $500 million for lending.
The increase in assets for our UK lending business a PGM. So it's very widespread and the same thing's true for.
For the year. So we feel good about that and we expect that to continue into this year and I would say that in terms of the increase in the liability and the increase CNR our guidance that we had given out at Investor day that is primarily due to an.
The increase in outlook Thats, all green Oak and I would say that's because we're seeing we're seeing new funds launched there that we hadn't originally included it'd be. Good example of that is is a cold storage funds. So that's a niche within industrial that was a fund idea that that.
Ken.
Starting to germinate last in the fourth quarter of.
2020, and today, we've raised over $1 billion.
And we've also another example of <unk> as they bought a very small small business from Carlyle in the secondaries business now called <unk> strategic partners Theyre out fundraising that's going gangbusters. So.
Are some of things driving the increased outlook there.
I appreciate the color. Thank you.
And thank you and then next question comes from many Grumman from Scotiabank. Your line is now open.
Hi, Good morning, we talked about some of the headwinds to the group business I want to talk potentially about some of the.
The positives here, Dan you touched on a little bit but.
Lots of discussion on what people are calling the golden age of benefits.
And just wondering if that's just a headline or there is something more material there thats really going to make an impact and I don't know if we look at the results. So far I don't know if we see that coming through just yet I'm just wondering your perspective on that given on both sides of the border really.
Yes, so I'll start and then maybe turn it over to Josh.
It's a really interesting dynamic and as you noted there's a lot of speculation on that clearly the labor market at the moment has become hyper competitive so employers are competing in whatever way they Ken for talent in fact, we're doing that ourselves and obviously, one very obvious way is with overall compensation and benefit.
Packages.
It's hard for us to tease out the <unk>.
<unk> drivers as to whether or not an employer is increasing the number of benefits and the.
The amount they pay for them, we do see anecdote.
Gary as well our number of.
Products.
It's been going up.
Alright.
Although in a fairly modest way over an entire book of business.
It does appear and this may be more opinion, then data that employers are using the compensation paid versus benefits side, the bigger lever to attract talent in this environment, but certainly the general direction.
Pressure is to preserve and expand benefit versus to reduce benefits.
At this time, so that certainly bodes well for the business and indeed again, we can't exactly as prescribed cause and effect, we are seeing nice growth.
Our group business and in our model.
Yes.
Yeah, I would agree with everything.
Certainly benefits are becoming more and more important.
One example, I might give you in Canada as virtual care Tele medicine.
Has become a little bit of a mess. If you like if you want to have a modern and competitive benefits program.
In your organization.
So the emphasis on mental health.
One effort that come with that.
Well I'll point that Mike mentioned.
You may have seen the announcements from Ontario, where theyre looking to.
Expand benefits coverage to cover what we call gig workers.
Yes.
The thing that we obviously welcome with increasing.
Increasing benefits congrats I have multiple cover.
The right thing to do so.
Agree with that.
Benefits.
We remain and are increasingly strategic tour for employers.
Thanks, Brian .
And thank you and then next question comes from Scott Chan from Canaccord Genuity. Your line is now open.
Good morning, Steve I, just wanted to go back to <unk>.
For a moment because you talked about.
Many many different product launches and if I kind of put it together looking back at your Investor Day, Yes.
Yes, 13 billion of net flows in 2020, we guided 20, Brian in 'twenty one.
This quarter you Sir.
It sounds like you've got there.
<unk> ability one year ahead.
So just wondering what.
With the pipeline you're seeing.
'twenty, one repeatable or not.
We're just in that particular year, just based on the timing of certain products.
Well I would say thanks for the question Scott I would say that.
There is some lumpiness quarter to quarter and we've seen it and we will continue to see it the reason is that.
We've got a number of different product types, but across the businesses. We do raise private equity style funds. So as you know those get raised periodically you have two or three closings typically have a couple of big closings and then that product you wont raise another fund for a couple of years and so there is some lumpiness to it and we saw some of that this year, we had a big win the middle of a big fund.
Of mezzanine fund raise for the eight mezzanine fund at Crescent.
They had a closing out their U S direct lending fund that was large this year. So there were some lumpy.
Fund raises this year, having said that.
We've got a number of things on the docket next year as an example will be cross sell will be in the market with their third European direct lending fund.
There'll be in the market with a couple of different PTO products. So so we don't I don't think there was anything that would be anomalous in this year.
Just kind of some normal lumpiness so.
I don't think were putting out a specific protection for next year, but we think it'll be another strong fundraising year in the same Zip code.
Okay. That's helpful. And then maybe my second question for Matt.
Just on the earnings on surplus.
Got it back at this quarter by Laura.
Seed investment gains in the past you've kind of guided near term.
Number and I think it's been below.
Below $100 million range I was just wondering with the rise in interest rates or the projected rise in interest rates.
If you've got any near term guidance you can provide on that line.
Yes. Thanks for the question Scott as you mentioned, we have $100 million.
Sort of a rough target plus or minus four.
<unk> per quarter and as you mentioned this quarter, we had the impact of the.
Impairment, but.
Overall, we think the $100 million range for earnings on surplus remains remains the right level, but you might sort of see it bouncing around from quarter to quarter.
Okay. Thank you very much.
And thank you.
And our next question comes from Paul Holden from CIBC. Your line is now open.
Thanks, Good morning.
<unk> normally gets a number of key.
Questions on the call but.
Non directed his way so far this morning, so let's get Mike involved.
There was a lot of volatility in the market clearly in January and MFS as you've messaged in the past tend to tends to benefit from these periods of volatility. So I'm wondering if you could give us some thought.
That's around fund performance sort of during this period.
And what it might mean, particularly for <unk>.
<unk> flows as well.
Good morning. This is Mike Thanks, Paul is getting lonely here.
I mean, it's such a short period of time.
I would say from where we saw some of the parts of the market peak in terms of the really high valuation stocks in the fall into the early part of the year and some of our strategies that had struggled we've seen.
Some pick up in performance.
I guess the way I'd frame. It is we think this is a year where the markets are going to be more volatile. We think that we're going to have bouts of downside just given the fact that for the first time in a number of years the central Bank is in play.
Around the world Central banks are in play around the world valuation starting valuations are high and there continue to be a number of risks whether they'd be inflation and what the impact of interest rates geopolitical risks and a number of things so.
Ed.
Having.
Emerging in newer emerging and more risk at the same time valuations are high I think it is going to create some challenges for the market our platform historically through cycle has performed well.
Historically, we've done well in more difficult environments, and I would say that being those tied to the economic cycle and so we'll see we'll see how that plays out but we do feel comfortable through an economics like cycle in terms of flows you see it quarter to quarter and we saw that in U S. Retail in the fourth quarter is when the markets get more volatile you do.
You tend to see flows for the industry come down some and I would expect that's probably what we'll see this year. If the market remains volatile people will sit on the sidelines cash actually is going to have an additional yield. This year. So people are likely to sit in cash relative.
So our view is as we got to think through the cycle. We're investing in those things that we think will drive growth through the cycle and we've been preparing over the last several years by not adding too much in terms of head count discretionary costs and we think we are prepared for a more difficult environment.
Great. Thanks, Thanks for that context, and then second question and maybe this one is either for management or covenants.
Related to the dental quest.
Acquisition, you gave us an update on expected close.
Maybe you can give us an update on any work Youre able to do ahead of close to help realize on expected benefits and synergies.
Yes, it's Kevin I'll start with that.
I would ask them to.
Two.
Speak to this but he has actually had to step away for a funeral at 11 and I'm mentioning that so that he does step away and know that mandate and I and Kevin Morrissey and David Healy have us have these questions covered so keep the U S questions coming.
I want to make sure that Dan does leave too.
Is that passed away earlier, this week and he needs to make it to the funeral so on dental quest as I said earlier.
There is a number of states still to approve it theres a number of steps to be taken we still expect it to close in May or June there are restrictions in how involved we we can be but we've been we've been watching in the business has been performing well. So we are as close as we can be but there are restrictions in terms of how much we can do.
In this interim period.
But we're expecting that it will still at least maintained but we thought it would in our original business case in pricing. So we're excited I hope that it closes as soon as it can and I think it's going to be a great addition to the business still.
Got it okay. Thank you.
Thank you.
And our next question comes from Lamar Prasad from core Mark Securities. Your line is now open.
Great. Thanks. My question is for Mike just flipping back to MSR tier so margin just keeps grinding a little bit higher.
<unk>.
And mix to retail or is there something else in this 43% pre tax margin I remember in the not too distant past talking about margins in the mid to upper 30% range. So just any comments on that would be helpful.
Hey, good morning, Thanks for the question Omar.
Obviously pretty good print in the quarter, but you've got the market backdrop and the beta backdrop, obviously has contributed to that so our costs arent going to rise at the same level you get some operating leverage that's going to drive the market higher we would continue to stay in that 35% to 40% through the cycle just to remind you that the first half of the year, where we've got.
Amortization of deferred compensation and stock compensation here tends to bring the margin lower and then you get better margin in the back half of the year. So for the year with a market at an all time high we printed a little over a 40% margin and thats. The guidance that we've provided so I don't think theres anything different that.
But I would provide.
Okay. Thanks.
From your answer on the earlier question.
Thanks Glenn.
With increased volatility in some of the challenges in the market would it be fair to suggest that the net outflows in the institutional business might might normalize.
It's possible.
Because that that book is primarily an equity books was the market continues to make all time highs you see clients rebalance.
In addition to that you get Derisking in DB plans and so that's definitely been a headwind for us as the market makes all time highs and so we're hopeful we're not hopeful volatility, but I guess the upside to that as it probably bring some redemption activity down and that the longer term strategy in that book is to diversify into fixed income so.
We can.
Be on the other side of those allocations, where people go out of equities into fixed income and Thats a clear part of the strategy here and so again as we think over the next several years, we would expect that redemption activity in that book hopefully to come down, but we do need to sell more particularly in fixed income.
Great. Thank you.
Okay.
Thank you.
And our next question comes from Nigel D'souza.
<unk> from Baird your.
Your line is now open.
Thank you good morning add a quick follow up question for you first on your.
U S group benefits exposure, just trying to understand the relative risk on.
<unk> and mortality experience could you give us a sense of the vaccination rates in your.
Group policies versus the general U S population is it higher lower roughly the same to get a sense of our.
Experienced could play out.
Yes, it's Kevin.
To take a crack at this but at a higher level level Nigel.
If you and Theres been a lot of discussion around mortality on this call for obvious reasons and I think it's appropriate discussion. If you look at the death rates in the hospitalization rates, where we do business and where you see them spiking you see us having COVID-19 death claims and we see us having more morbidity.
And that happened to us this quarter in the U S and in the Philippines, and it has happened to us in other quarters.
India, and Indonesia, as well and it does relate back to vaccine rates. It relates back to lockdown approach by country and those types of things and so <unk> is not going to be with us forever.
We know, but its not ending now either I mean omicron is has taken hold so I would say that in general if you look at death rates and hospitalization rates in the countries, where we do business that gives you a good indicate indication of.
Mortality.
And morbidity when it's when it's spiking and I think that's the best way to look at it.
This is.
We are this is what we're here for these claims are important because they help protect our clients and it is why we're in business. It's part of why we're in business and I think that these are obviously challenging different areas. So I don't know if we can give you the vaccination rates in our group benefits business.
<unk>.
Versus the general population, but what I did say is that this quarter when we talk to Dan.
We saw consistent too.
Industry and spiking death rates in terms of our mortality and morbidity claims Kevin Morrissey may want to add a comment though.
Yes, Thanks, Kevin maybe the only thing I'll add to that.
Think about the claim when you think of individual life insurance.
Individually underwriting underwritten, we see a benefit in terms of underwriting effect and we've seen that across all the geographies, where generally the mortality rates are lower for the insured population and the uninsured.
It's generally a positive when you switch to group business, that's much more broad base, we don't have individual underwriting done and I think.
<unk> more more accurately reflects the profile of the population.
Okay. That's helpful and my second question was on your effective tax rate, it's running around lower this quarter and I understand that.
Makes us a benefit from tax exempt income.
Tax item from the prior year that were resolved I was wondering if you could just provide more color on that how much of the decrease was for tax exempt income versus prior year issues and maybe some specificity on what exactly drove it in.
Color on where you expect that tax rate to run that going forward.
Good morning, Nigel it's Matt. Thanks for your question. So as you know the tax rate can move around from a quarter on quarter basis for many reasons. The jurisdictional mix of earnings the true up of prior year tax matters and the nature of the income that we generate in the quarter as I mentioned in my prepared remarks. The two main items that drove the lower tax rate this quarter.
<unk> was sort of the.
The increase in the non the tax exempt income and the resolution of prior year tax tax matters, and we've disclosed that in our financial statements, but to give you a rough estimate it's about about two thirds of that is related to taxes.
Tax exempt income and about a third of that is related to resolution of prior year matters and then in terms of your last point in terms of how we think about it going forward, we think about the 50% to 20% range for the full year, it's still a good good good good way to think about it.
And the specific quarter you can have differences for the reasons I mentioned.
Okay, and just a clarification on that I mean are these items that are essentially automated where there's a marker.
Triggers the recognition or is there any collective nature of.
When you can recognize these tax items.
No Theres no theres no sort of.
You don't get to pick one of these things happen.
Okay. That's helpful. Thank you.
And thank you.
Im showing no further questions I would now like.
We have no further questions at this time and I would now like to turn things to Mr. Bearden 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.
And have a good day.
This concludes today's call. Thank you for participating you may now disconnect.
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