Q2 2022 Sun Life Financial Inc Earnings Call
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Welcome to sunlightlife's earnings call for the second quarter of 2022. My name is eve bitten and I will be the host for the call today. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife com.
We will begin today's call with opening remarks from Kevin streing, President and Chief Executive Officer.
Following Kevin Dan fish by President of Sunlight U's, we'll provide an update on the dent toquest acquisition.
managt Sing Executive Vice President and Chief Financial Officer will then 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 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS 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 neve, and good morning everyone.
Before getting into the quarter, I want to discuss the agreement we announced earlier this morning, the sell our CLO block of business in the U K the Phoenix group for approximately $385 million.
The economics of the transaction relate to our U K life and pension business, which has been running as a closed blocks since 2001. Phoenix is the K's largest long-term savings and retirement provider. They have the scale and expertise to run closeed life pension businesses and we are confident they will deliver exceptional client service.
As part of the transaction, we will enter into a long-term strategic partnership with Phoenix to become a preferred asset management provider. Mfs and C management will continue to manage approximately $9 billion in the U K general account on behalf of Phoenix. They will also become material partners to Phoenix, supporting their goal to invest approximately U's 25 billion in North American public and private fix income, as well as alternative investments, over the next five years.
Phoenix had over £31 billion sterling in assets under administration as at December . thir, ty-first, twent ythousand and 21, with a strong track record of growth. In the last five years alone, their a has increased over 300% through both organic and inorganic growth. It's an exciting opportunity for us that is aligned to our strategy to focus on less capital intensive businesses in markets with natural tailwinds. The transaction also supports growth in our asset management businesses.
On close. sunlife will release capital held to the for the life and pension business. We estimate a liad benefit of one cent to- 2% associated with the capital release. However, the final amount will be determined on close.
Sunlight will continue to maintain our economic interest in the U K payout annuities business. This block of business has an attractive risk reward profile with strong ROE and cash flows, and has been optimally structured from a sunlife capital perspective. We expect that this business will generate approximately $3 million of annual underlying net income after the transaction closes in the first half of 2020. -three.
I want to take this opportunity to thank our team in the U K for their passion and dedication to sunlife. An important part of our decision-making process included finding a company where our U K employees could continue to grow and develop their careers, and we believe we have done so with Phoenix.
Turning to Slide 5, we provided an overview of our second quarter financial highlights. Our diversified business mix continues to demonstrate resilience and strength. Reported net income of $785 million was down 13% year-over-year, predominantly driven by market impacts. Underlying net income of 800 and N $2 million was up modestly. magment will discuss the quarterly financials in more detail. Overall, we saw good growth across the business despite challenging conditions. Canada had a strong quarter as disability results improved. The? U's was also strong as COVID-19 mortality impacts moderated and we added approximately U's $1 million in earnings in the U's for denttoquest.
This happened after the close on June . The first: these positives offset lower fee income at MFS driven by equity markets and a relatively in-line quarter in Asia, as covidt related restrictions continue to impact the Hong Kong business.
Capital also remains sold in the quarter, with 128% LICAT for sf and 124% for SLA.
fivelide six highlights several strategic initiatives from the quarter that support our client impact strategythis quarter we expanded our commitment to sustainability as LC management's fixed income business signed up to the net zero asset managers's initiative, joining previous commitments made by other LC affiliates, including mentental, greenobgo and InfraRed. In Malaysia, we launched the first Sharia complient investment linked tackable ESG fund. The fund provides an affordable and accessible avenue for clients to embed ESG factors in their investments.
As part of distribution excellence, we renewed our bank asssurance partnership in the Philippines with RCBC, one of the country's leading commercial banks. The partnership was renewed for an additional 10 years and will continue to provide RCBC clients with access to financial protection products.
We also saw another quarter of strong momentum at LC management, with capital raising of five point seven billion in the quarter. We're seeing good traction across all asset classes offered through our diverse alternative investments platform, including bge, where investors are pivoting to debt secuure by real estate to provide protection against current economic conditions.
And our position as a trusted brand was recognized as past quarter by corporate nights Magazine, which once again included its Sun Life on its list of the best 50 corporate corporate citizens in Canada. We have appeared on the annual ranking for 17 years and the 2022 edition ranks us twenty-first overall, driven in part by strong scores on Executive gender diversity Board, racial diversity and sustainability linked to Executive pay.
Slide seven provides highlights on our digital leadership by focusing on digital priorities and continue to develop our operating model. We are making great progress in our digital journey. In Canada, our digital coach EA, continues to help clients make better decisions, driving year-to-date increases in both wealth deposits and insurance coverage, which 14% and 64% respectively from prior year.
We're also making excellent progress in the? U's, with 76% of claims submitted digitally in the quarter, and in Asia, we saw a significant increase in digital submiss of new business applications, up 13% over the prior year. I'm also excited to welcome Chris weway to sunlife as our Executive Vice President and Chief client and innovation Officer. Reporting to me, Chris joins our executive team in this new global cross enterprise role, leading sunlife' commitment to client experience excellence. Chris will be responsible for identifying and cultivating innovative solutions focus on achieving our purpose, including establishing measurable targets while maximizing our impact to foster a sustainable society and healthier planet. He will lead our sustainability global marketing and corporate Communications functions. Chris brings more than 25 years of global leadership experience in insurance and wealth management and we're excited to have his depth of knowledge and experience on our team.
With that, I'll hand the call over to Dan to discuss the close of denttoquest. We are excited to have dentist joined the sunlife family.
Thanks Kevin. I'm pleased to provide an update today on vententtoquest. Since closing the acquisition on June . firstwith the addition of denttoquest, sunlightlife is now the second largest dental benefits provider in the? U's by membership, and we now serve more than five million Americans across all of our benefits products combined, we expect to generate more than $7 billion in total annual? U's benefits revenues as one of the largest providers of specialty benefits in the U? S.
Over the past decade, we have transform the? U's business from a mostly retail, individual life and annuities business to a high performing market leading benefits business. The denttoquest acquisition continues this evolution, changing the footprint of our business in the? U's into a larger, more health care focused organization, now with more than 70% of our benefits revenue coming from health care. These changes have transions Sun Life? U's from a capital intensive to a capital life business with strong cash flow generation. From businesses with long term risk profiles to mostly short term risk and fee based businesses. From slow growth markets to higher growth markets and from ROEs in the single digits to a return on tangible, tangible equity in the high teens. The denttoquest acquisition adds a large and growing business that aalign strongly with our risk and return profile and advances our business strategy to be a leader in health and benefits. Together we will do even more to provide great oral health care to all and to health. People live healthier lives. We welcomed 2400 denttoquest employees to the sunlife family on June . firstthe leadership team for the dental business is in place, consisting of a blend of denttoquest and Sun Life leaders, and is focused on growth strategies revenues, synergies and optimizing performance. We're approaching integration with great care and our goal is to realize the full potential of the transaction for all our stakeholders, including providing enhanced offerings for clients, delivering on our accretion and cost savings targets for shareholders, creating new opportunities for our employees and delivering a positive integration experience for allwe have a strong track record of successfully integrating Group benefits businesses while minimizing disruption for our clients. Many of the leaders who manage the Assurant integration are involved in the denttoquest integration.
We are focused on integration activities that will support our run rate cost savings target of U's six million by 2024. We're off to a strong start with a fully integrated leadership team, engaged employees and a detailed plan for the remaining steps.
This quarter we began reporting separately on the performance of our dental business, which includes denttoquest, both the government and commercial segments, and the existing Sun Life U's dental En vision business. The second quarter includes one months of results for denttoquest and three months of the legacy sunlife dental andenvision results.
I'm excited about the future at sunlife? U's. We now have four strong businesses with market-leading positions in dental and stop loss and a top 10 employee benefits business, although recent results have been somewhat masked by COVID-19 impacts. Once this subsides, we remain confident in achieving our medium-term targets for the? U's, including 10% or more earnings growth for our benefits businesses.
At this time. I'd like to turn the call over to mant.
Thank you Dan, and good morning everyone. Slide 11 provides an overview of our second quarter results.
The results reflect the strength of our business fundamentals and the benefits of our diversified business mix amidst a challenging operating environment.
Reported net income in the quarter was 785 million down 13%, primarily driven by lower equity markets.
Underlying net income of 892 million and underlying earnings per share of a dollar 52 were up 1% from the prior year.
Good insurance sales. Moderating covidt impacts strong credit results. one month of earnings in the denticus acquisition and disciplined expense management helped to offset lower asset management results.
Underlying return on equity was 15% in the quarter.
Book value per share was up 6% over the prior year and, excluding the impacts on other comprehensive income, book value per share was up 10% and.
We continue to maintain a solid capital position with liket ratios of 128% at SLS and 124% at slla.
The decline in the sf ratio from last quarter primarily reflects the closing of the denticest acquisition and market impacts in the quarter.
Now let's turn to our business group performance, starting on Slide 13, with MS.
niffas reported net income of U's 228 million, up 19% from the prior year. Reflecting fair value. Chang is an outstanding share-based payment awards.
underlyining net income was down 17%, driven by lower average net assets in line with the year-over-year declines in global equity markets.
Mfs generated a pretax net operating margin of 36% and.
Operating margin declined by three percentage points from the prior quarter due to lower average net assets, partially offset by lower variable compensation.
Aum was down 13% from Q1 to U's 553 billion, largely reflecting lower equity markets in U's five point five billion of net outflows.
Net outflows in the quarter were driven by U's retail, reflecting significant industry-wide retail redemptions. In fact, Q2 reflected the highest level of U's retail industry redemptions in over 30 years.
That said, MFS all lower relative retail redemptions as of proportion of AUM compared to the industry.
Institutional inflows were U's one point five billion in the quarter.
Turning to Slide 14. SLC Management delivered another solid quarter with reported net income of five million underlying net income of twenty-three million.
Underlying net income reflected strong growth in fee-related earnings, partially offset by real estate investment mark-to-market losses.
Fee-related earnings were up 13% from the prior year, reflecting strong capital raising activity and the deployment of capital into fee-earning AUM over the past 12 months.
The fee-related earnings margin of 23% was down modestly due to continued investments in business growth.
Strong capital, raising up five point seven billion. The quarter reflects the diversification of our investments platform, with positive momentum across all investment strategies.
Total AUM includes 21 billion. That is not yet earning fees. Once invested, these assets can generate annualized fee revenue of more than one hundred and seventy-five million.
On Slide 15. Canada's reported an income of 16 million was down from the PRI year, mainly due to market-related impacts.
Underlying net income of 344 million was up to 19% from the prior year, underpinned by good business growth and favorable mortality, morbidity and credit experience.
This quarter's results also includes higher large case grew benefit sales in sunlife health and solid growth in third-party insurance sales.
Wells sales were supported by higher large case mandates and group retirement and defined benefit solutions, partially offset by lower industry-wide retail mutual fund sales.
Turning to Slide. 16? U's reported income of U's 167 Lane was up 31% from the prior year, reflecting real estate gains.
Underlying net income of U's 121 million was up from U's 93 million in the prior quarter, reflecting one month of earnings from denttos, a more normalized group life mortality.
roof-flight mortality significantly improved in Q2 in line with improvements in the overall population.
We also saw some moderation of favorable stock loss mobidity experienced in the quarter, but inpatient utilization remains below precovid levels.
Our U's business continues to demonstrate strong core fundamentals, with solid growth in premium and fee income, good client persistency and benefits from investments in Pinnacle care and entquest.
Slide 17 outlines Asia's results for the quarter.
Reported net income was 100 TH 31 million, down 8% from the prior year in constant currency.
Underlying net income of 148 million was down modestly on a constant currency basis.
Second quarter results were impacted by lower sales in Hong Kong driven by pandemic-related restrictions and lower equity market-related fee income.
This is mostly offset by higher new business gains in our international high net worth business and, while international sales were lower than the prior year, profitability of sales is up as we focus on selective origination in the high net worth market.
Outside of Hong Kong, and international insurance sales grew double digits in the rest of our markets as they emerge from pandemic restrictions.
Asia Wells sales were lower than prior year, reflecting declines in global equity markets.
Overall we're pleased with our results this quarter. Some life' attractive mix of diversified businesses once again allowed us to deliver good performance in a challenging operating environment.
The fundamentals of our business remains strong and we are continuing to invest to drive future growth.
And the investments we have made in recent transaction transactions, including an LC management dent, equest and bank assurance in Asia, are performing well and contributing to results.
With that. I'll turn the call back to E for QA.
Thank you, magjic. 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 reque you with any additional questions. I will now ask the operator to pull the participants.
Thank you.
We will now begin the question. And and cession.
Ask a question. You may press the startard on one on your touch phone phone if you're using a speaker phone. Please pick up your handchart before pressing the keys.
If at any time, your question has been addressed and you would like to withdraw your question, please press the start and Q. at this time, we will pause momentarily to assemble our weter.
The first question comes from many brahan socisha bank. Please go ahead.
High good morning. Question about Asia. Looks like COVID-19, North America's putting COVID-19 behind and we saw the improvement in the? U's, but in Asia looks like COVID-19 related restrictions continued to be a factor and this quarter we saw in Hong Kong. I'm wondering what the outlook looks like, or what you're seeing so far in Q3, but then even beyond that, do you expect any material change in in COVID-19 related restrictions or is this going to be a persistent issue over the foreseeable future?
Thank you very much for the question. Many singinger Johnson from Asia. I've actually just spent almost four week touring Asia and went to almost all of our markets other than India and china- and it's exactly us. The rest of Asia is actually opening up really nicely.
Where in Hong Kong, you still facing some of the restrictive measures that to use the athicxera COVID-19 policy.
I have earned the new Chief execuive. That is being evaluated. That's very uncertain and you correct. We do see that implications flow through into our sal and principally also with the borders close and the virtually zero M CD sales. Versus in 2016, it was at a tight nine billion and there was a highwayating of our competitors.
On that we be able to write that business. So we are see increased competition domestically in Hong Kong in quarters of contraction of GDP.
There's no doubt that this.
This needs to change- we're not sure when, for we Re preparing and making sure we build a really great business. That's position for to take advantage as the restriction need.
If the zero policy, zero COVID-19 policy continues? Are there any changes you can make to that business or anything you're contemplating? Adjust to that ongoing reality.
soimportantly, we've also faced the market volatility that's been felt globally. So we, numberber two in terms of our MP fad, still have a very strong position of all with a third positioned. So we very strong in the we business and that we will continue. And the business is very well positioned also with our bodtime insurer. That's got good momentum. So we feel that we Re well positioned to sunund life with our global positioning, that we want to strengthen our offerings in Hong Kong. So we cautious the optimistic and we do believe that Hong Kong wil moved at some point and we will be well positioned to take advantage of that.
B can we actually committed to a inustsame objective percent?
You in apprehitton.
The next question comes from com mckenan PMO. Please go ahead.
Yes Thanks very much and good morning with respect to dicquest is it possible that you might be able to share with us the underlyingned.
nings that DentaQuest contribute in the one month that you had it in the second.
And have fall up.
Short timem. This is Dan fish buying in's dollars. The underlying earnings for dentch quest in the one month was $1 million.
Okay that's greatthanks. And then the falls with respect to corporate. Just wondering how that might trend.
An underlying earnings loss of thirty-five million.
Think maybe higher year-over-year. I assume that from increased debt. Just wondering how that might trend going forward until you fell the. Until the close of the U K block.
And then when the close of the UK block happensi.
Think the you would lose.
Another four million in annual earning.
And would that be in that corporate block as well. So just a little bit of color there thanks.
S a good morning, Tom. It's managed. Yes, the corporate earnings, as you know, include a number of factors, So they do move around lympic quarter-to-quarter. This quarter we did benefit from favorable expense experience, largely in the corporate segment. So that's what reflected in this quarter's results. And then to your point: going forward: once the clock transaction closes, we would, you would see a decline in that number for the business that we sold and we mentioned in our slides. That would be about the four million outlined.
And that's 40 mons on to annual basis.
That's right and does.
Yeah I think you had mentioned before that after dividends and investment in the business that you generate excess.
Capital about a billion annually. Does that change at all with this divestiture?
No I don't think that changes materially for the divestiture. As we've said, the four million is is a relatively small number and, as you know, as part of the transaction we are freeing up capital and obviously we'll use that capital to generate additional earnings. In Tom it's Kevin. Of course we've also entered strategic management partnership with with Phoenix and you know we expect that we will get a good chunk of the 25 billion they planning to deploy over the next five years into the North American sort of asset management's base and that will provide an income stream that will make up some of the lolast revenue. So deploying that, the capital we get back and also the asset management agreement are, in combination, I think, a good support to the earnings.
Okay and how much do you expect to get on that twenty five billion?
It's going to. it'.s going to, it's going to emge over over the next five years and you know you, you might even say it would emerge sort of pieces over the five years. You can look is Steve talked about in his slides what we expect from the alternatives. This will be a mixture of public fixed income to alternative asset management. So so's it's. It's hard to say exactly what the timeline will be. There's a process and a finproduci responsibility they have for bring them on, but you will see that earnings emerge and weexpect that will make up a good chunk of what we've, what we've lost and in fact, the other pieces. You have to remember this is a closeed block for the life and pension business that we sold. We ex expect that that was going to decline quite significantly over the next five to seven years, whereas the pid annuity business that we're keeping we expect to be fairly stable from an earnings perspective and cash flow perspective.
ok thanks for that.
The next question comes from coarckchen, with kenic orinity. Please go ahead.
Good morning my. My question actually follow up the Tom on dent quest. I know it's one month but Dan, is there any seasonal impact on that business? More like a one and two million annual run rate is.
It kind of what we're looking for.
Yes good morning. I would caution that one month is not necessarily a trend and so multiplying one month by 12 is always a little tricky. What I can say is we're still confident in the accretion projections that we made when we announced the transaction and certainly the results in June would support that. We did see a little higher margins in June then, perhaps we expected, and a little lower revenues, but the higher margins more than made up for the small variance and revenues. But overall I think the the comment we would make is: at least this first month gives us confidence in our prior projections.
And if I take that first months and just to annualize it and just doing quick math, it seems like the earnings power is substantially lower than we announced the deal and could be some risk to that.
Eps accretion targets, or is that not the case?
No that's not the case. The accretion target we announced actually translate to a number a little bit lower than the June number.
ok kind, Thank you.
The next question comes from dog yyoung with tetheran capital market. Please go ahead.
Good morning, Dan. On the U's group insurance business, underlying earnings were down year-year year and I know those' puts and takes in here but hopefully I'm just hoping you can flush of some of those puts and takes. When we look at that- and I know the LTM margin was 5% - you know you're targeting seven per us. I know potential invision business has been strippedted So it's not really comparable. I'm just wondering: is there a new target for a margin for the U's group of insurance business you can share with us?
okso few questions there. The first one on the group earnings or the group benefits earnings compared to the same quarter of last year. Your observation is obviously correct and the biggest driver there is that in the second quarter of last year we had really outsized stop loss results and we continue to have very strong stop loss results this quarter, just not as outsized as they were in that quarter last year. We also compared to the prior quarter last year we had had a very strong quarter and long term disability and was certainly less strong in this quarter. So those are the primary drivers there. In terms of the margin, remember that we report a rolling 12 months or rolling four quarters metric. So partly what you're seeing here is looking back several quarter. The current arter was actually quite strong, although again compared to a very strong quarter last year. So we actually swapped out a very strong quarter very not quite as very strong quarter this year, but that's a, that's a four quarter metric. That, while obviously improve over time in terms of the margin target, we dental was obviously a very, very small part of that in the past. It would be a very big part of that now if we included dentto quest and margin we've concluded is not really the best way to think about the dental business, especially in comparedison or in combination with the other group businesses. Dental businesses comppetitively have relatively low margins and that's because they have very high are ES, because they require much less capital than other group businesses. So we're going to report dental separately and likely use other metrics for that. But for the remaining group business are margin target remains the same as it has been, which is 7% or more.
Just a follow up: when you, when you think about getting from four point seven back up to 7, is it more on the group life or benefit like a health business, or is it on the stop last, like where do you see it's stop last? Still above that 7% coming down in the group? Like, can health moving up? Is there been a change in that shift?
Stop LOUs is still above and group is still below, while while COVID-19 incidident certainly has improved dramatically, there's still our COVID-19 impacts in the business. You see some of that, a little of that, in long-term disability certainly there's, especially over the past four quarters. There's still quite a bit in mortality there. But we would see stop loss may even dripped down a little bit as some of the favorability from delays and care gradually moderate. But on the other hand we would expect group life and group disability to go back up as the COVID-19 impacts fade away.
Okay just second Kevin on the sale of the U K.
If the question was: why retain the anuity business? I think you covered a little bit about that, but is this also a play on? You want keep longevity to offset the build out a de life insurance business and, and when you think about those deploying capital, can you remind us you know? What are you focused on and, from an acquisition perspective, what are' focused on?
Yes thanks oug. So it is a it is a bit about we like the the risk profile of the business but but we've optimized that business for our book and under if R 17 you actually see a slight growing pattern over the next 10 years to that earnings and the earnings almost come back one one hundred percent or maybe even up more than one hundred percent. In cash lowand. It's got a very good ROE. So we like the risk profile we like the the structure of it and it helps all of our three medium term. Objectives course. We're thinking more broadly about M N a that's what we're we're looking at we're looking at adding does does the acquisition or disposition add to our strategy does it fit in with our strategy on an acquisition. Is it adding either capabilities or is it adding scale is it helping our three medium term objectives. So is it accretive is it helping our earnings growth is it is it supporting the are we objective that we've put out and are we getting cash flow out of it and then importantly can we execute on the transaction. So we've deployed capital against all of those over the past of the while you've heard D now talked about tenent to quest. But you know you've seen the benefits of adding the's L C businesses and the bank assurance in Asia. So it's it's really about those things are we are we adding to our strategy are we meding our medium term objectives and can we execute on the on the integration. Thank.
The next question comes L from abriabasshame national outbank financial. Please go ahead.
Hi good morning. Just a follow-up on that. U K. what's the underlying of the earning of the retained business?
It would be approximately the 30 that I talked about gape during the uring my opening remarks.
three Million but it's also you know if.
Potential trends on the.
Mortality side.
Looked up the other way.
Continue he could still have much more material reserve releases in the future.
Maybe yes Kevin, to speak to the reserve releases, but it's, and the 30 is under an IR for a 17 basis.
dav, this Kevin mory. Yes, our experience has that quite good over the long term on this block of business. It's one of the reasons why we retained it. We have very- we have very- sophisticated message to mentioned the investment risk of is very little kind of net for residual risk there and we like kind of the profile, as Kevin mentioned, of the business in the cash flows coming out of that. So yes, there is certainly some potential upside on that business as well.
While I got to Kevin one of year F, the big U's life insurance took the big reserve charge for UH.
Uh laps risk in the UH no last guarantee business line that they're.
I don't think selling anymore. You've got it on your runup block. Is there Re you, competent those reserve levels? I believe you would have been more proactive over the years on the.
On identifying reserve for those left trends.
Yes that's right, gab ROs. As you know, we've been very keen to focus on that experience and make updates in the assumption reviews annualually to make sure that we're got that right up to the most recent experience. So last year we did strengthen. 've been monitoring that since then, happy to report that since that change last year the perience has been fully in line with that last update. So certainly looking good over the last several quarters and we don't anticipate any further changes to the lapse assumption on that block.
Okay in a last quick one.
On SLC the two billion that's not yet been deployed in the.
Revenue potential of fashion up. What's the?
Forgive mentch. This is an athth already but.
The timeline respective deploy. The capitals are the investmentcap.
Gabriel Steve pizz. Thanks to the question. Yeah, that 20000000.020999998 trillion reflects the nature of the alternative invassment business. So you know, across our real estate, alternative credit and infrastructure businesses.
We raised closed in funds and the the capital gets committed by institutions. It's and it gets and we draw as itgets depyed. In some cases we earn in fees just on the commitments, but in many cases, in most cases, we don't earn fees until it's deployed. In general, those commitments, you'd have a three year investment window in the product. So some of those commitments would be toward the end of the investment period. Some would be money we just raised. So I would expect on average that money to get raised over the next year, year and a half. Now I would say that at the same time, because in some cases these funds are the six in a series, of the seventh in a series. You also have funds that are at the end of their life and that are in disposite.
Mode And so you're always raising new funds, you'reinvesting. Some are rolling off, and I would say to your question that 20 blades should get invested on average over next year, year and a half.
ok Thank you and enjoy the your summer.
The next question comes from Mario and delca with the T D securities. Please go ahead. Good morning everyone. Could I just ask a little about experience? policyielder experience like the more underlying experience. There there's a pretty big shift from Q1 to Q2.
And what I'm trying to get a better appreciation for is the extent to which that that moved from say, negative mortality of 90 and morbidity of 18 and also, on other lines, how that moved from a charge in Q1 to meaningful gain in Q2. And the way, the way I want to approach this is if you could help me think through what portion of that is just truly actactually, just different, different results, and how much of it really just reflects different underlying expectations in Q2 relative to Q1. I think you appreciate where I'm going with this, how much of it's actual and how much of it is really a change that the expectations were different for Q2.
Look I might actually step in meritsth, Kevin. I think Dan should talk about the? U's mortality experience, because that was a significant part of the change, and then we should have joacqu talk about the disability experiencec ING Canada, because that was also a big piece, and danieyou might want to touch in disability as well. And then, if we still have some open items to wrap up mery, I think either manandjit or Kevin, I can come back at the end.
Sure this is, Dan. There was a very big change, as you can see, in mortality, particularly in the group life business during the first quarter. We actually just a quick comment on the in-force management business, the legacy individual life business. We had a couple of large claims there so that actually went a little bit the other way, at least compared to the quarter, the prior quarter in the prior year as well as sequentially. But that's just the nature of the volatity in that business. But the really big change was a a great lessening in the COVID-19 mortality from Q1 to Q2 AR. Our COVID-19 mortality experience actually declined by 90% from the first quarter to the second quarter. So that's the biggest driver from the U's that you're seeing there. It was not a change in expectations that blends in very slowly between first quarter and second quarter. There would be very little change there. It was actually a very big change in the mortality experience.
chalck.
Then Mario dec isionhaac, the material change in Canada in mobidity.
That is driven mostly by group visibility, experience and sunline health.
therei ve talked about this before, but there are a few key components there. one is the incidence, or the volume of cases we get, and the other one is how long are short the durations are before people go back to work. We have positive experience in both incidence and duration.
Keep in mind also Mario that starting in 2019 we started putting price increases through the walk and that's also impacting So.
At this stage it's hard to say because we have one deba point of Q2 being a good experience quarter, that would be cautious to declare this a new trend. There's a lot of things that influence incidents, for example, so strong area of focus as we've had in the number of quarters. Now, as you know- and we're continuing that- we're watching it closely, but that's the main driver in Canada.
It's Kevin. Again, I would say that both of these items have been headwinds for us in in the comparative Court. Is that? You're talking about Maryland, So you can see that this in a way as taking management actions in the case of jock, and then a big change in the COVID-19 death rates in the case of the? U's business that you're seeing, and we talked about COVID-19 mortality in particular a lot in Q4 and Q1 and those were disproportionate negative impacts and we're sort of getting to a place where the COVID-19 deaths now are, I think, roughly in the 300 to 300 a day in the? U's and they had been running at close to 3000 a day. And I think jock answered the morbidity question. Yes, I think that. I think I understand now that actual changes and manageedment actions were the driver, not any big change in expectations. Perhaps a final sort of line of questioning in this respect: the expense side turned real positive. This courart of the forty 4, was that a management?
Management action or a change that resultted in that gain. I would imagine that's less about expenses as well- are sorry- less about expectations as well.
The Hi merits managementit. Yeah, I think there's acouple of elements in there. The one element is around management actions. You know, as you know, we've always had a very keen focus on expense discipline. We keeping that focus. All of our bus businesses are are focused on driving a productivity inside of their businesses and know that's resulting in sort of slightly lower expenses than we thought. And the second element is obiously given them the, the moves that we've seen in the markets are some of our share based compensation expense plans. There's there's downward downward impact of that. So the it's a combination of those two things ok. and then maybe just one final thing. If we you go to that contract serv margin, I think the company's guiding m- just due on memory, I think it was $4.5 billion or that right is a four point five or $5 billion in contracts service margin. four and a half billion was the adjustment to our shareholders' equity on 1: one twenty two
I'm sorry, and did you say that most of that related to establishing the contract servicemarginwhat I? Would I be correct in saying the contract service margin should be? You're guiding us to maybe four point five or my not. Am I reading too much into that? Yes, I think there's two elements of the contract service margin. one is the adjustment to the equity, that which I spoke about in our call of May 30. first, we said about two thirds of the shareholders equity adjustment gave you would be a part of the contract service margin. There's also another element, which result, which which is related to the change and how we present the liabilities, and that information we haven't provided yet.
Okay So the contract service margin could in fact be less than four point five billion. Is that true?
We haven't sort of said of said that, but I I would say it's going to be more than the four pointfive, $5 billion. Okay, got it, Thank you.
Thank.
The next question comes with David montmaiden with Evercore I as I please go ahead.
oky thanks, good morning. I had a question just just on the U? K business on the bit that was retained. Could you just describe, I guess, why you are retaining that? Is that something you could consider exploring, something similar with transaction on in the past, or is there is there something about it that made it that that Phoenix?
You you keep maybe just some color on on why you didn't sell the.
Business as opposed to retaining the annuity business, will be helpful.
David this, this business, has been optimized to our business and our sort of capital structure. If you, as Kevin said, we like the risk profile fits well in and, as I said earlier, we we like the earnings and cash flow and ROE that are coming off of it. So it was one overall that, as we were doing the transaction, we decided we'd rather keep than sell. You know the it didn't impact us getting an effective asset management agreement and we also got, we believe, a very good price from from Phoenix on the parts we sold. So we were actually quite pleased to be able to keep this and that was us driving it more than Phoenix and the otherthing I would add. You know, if we look at the returns on this business- Kevin kevins comment about how we structured- it is 20% plus, sowe'revery happy with the returns we're getting on business.
Okay great, and then maybe just taking a step back, and I think in the past didn't sound like you guys were in a rush or had really focused on trying to do something more strategic in the U's on that en-force management business.
Has that changed is does this transaction you know that that you did with Phoenix on the U K was that more of a of a one-off to get the asset management agreement or you know is this something you know a broader initiative that you guys are starting to to think about in terms of just getting.
Maybe potentially offloading or doing something more strategic with the in-force management business.
davidi, T's Kevin again, if you looked at the life and pension business that we sold again, that bought closed in 2001 and we were expecting income to start to declineand cash flow to decline and at some point you start to lack scale. In the IFM business in the U's, we like the earnings profile, we like the ROE coming out and we like the cash flow coming out of that business. It also supports our asset management business right, So it gives us asset management to provide to SLC and so we think that's a positive. So at this point in time I would say that the IFM business is a bit like the pyout business in the U's. We like the profile of it, we like the earnings in the cash F coming out in the ROE, and so that's how we're thinking about that. If, if you watch, there is a number of asset management companies that are buying these close blocks for the cash flow and so that's strategic for us to provide that- that cash flow back to SLC as well.
Got it okemic sense, Thank you.
The next question comes with constrction paholdon with CIBC. Please go ahead.
Hi good morning.
I want to go back to the U's group business because there's just being a lot of moving pieces over the last year and a half and you mentioned targeting sort of a 10% organic growth rate in that business.
Is there anything today that would suggest to us that the growth rate could be?
Higher than 10% just given.
The extent which you're growing. Stop loss the price increases you mean pushing through, or maybe there's factors that would suggest don't get too excited. Maybe it's going to be a little bit less than 10% in the near term. Maybe you can talkk through some of those dynamic for us.
Sure well, well. I'm always excited about the future, So and an optimist. So you may have noticed that even without the addition of denttoquest and Pinnacle care, the premium and fee revenue of the? U's rose by 10% in the past year. So we're clearly generating significant organic growth and that should translate into earnings growth as well. Now denttoquest is has been a growth engine, you know, over its history it's had, you know, times of very rapid growth. A little bit of a caution there. It's something new for us all. Their business is very lumpy. Contracts are very large, smaller in number but very, very large. So there will be times with dent toquest where they show, you know, dramatic growth from just adding two or three big contracts and then there may be pauses in between some of those contracts. But we think there's a lot of potential in the denttoquest business on multiple fronts to continue to win new government contracts in Medicaid, to expand significantly in Medicare Advantage, which is really a relatively new area for them, and to put their capabilities and our legacy capabilities together to make a first class commercial dental business as well, So that business can grow at a very good pace. Stop loss also, as you've seen for several years, has been growing at a very good pace. We Re the industry leader there and as we come out of COVID-19 we have loss of optimism for what we can do in the group business. As you've probably noticed, after several years of that business being relatively flat, the past year and a half it is really started to grow organically. So we're confident in the 10% number and certainly I always think there's upside.
ok'. So that's a great answer. Thank you, and I think I think we'would being pretty quiet for microvero. I'll ll ask a question on NS. So we saw positive institutional flows this quarter. I wonder if that's just the rebalancing impact. You've talked about that in the past. You to work the opposite way with higher equity markets, So wondering if it's just institutional clients taking or really, I guess, rebalancing portfolio, adding more equity, or if there was something more to it.
Good morning this Mike. You know, I think you know the institutional flows do tend to be somewhat lumpy and you know there were just a number of winds that funded in the quarter. You know some of that would have been rebalancing But I think was just activ, the client level where we lined up well with those particular opportunities and they happen to fund that particular quarter. So that's really what drove us sort of the color behind the.
Institutional flows.
Okay and then just quick follow-up. I mean, is there any sense you can give us, given the current pipeline today and where things might land the in the future?
Yeah I mean we don't comment on what pipeline looks like you, what we think the future looks like. All I would say is we expect institutional flows quarter-to-quarter to be relatively lumpy, based on what clients are doing in the size of the mandates that they're putting out. So I mean know, but not not comfortable giving a forecast.
Okay I to try to try okay, Thank you, Thank appreciate.
Next question comes with comes from Nigel dissoer, with very tough investment research. Please go ahead.
Thank you, good morning. I wanted to follow up on experience and specifically on the expense side. I mentioned earlier to Delta. Your, your own expenses is' pretty significant and and I'm wondering if you you could flush out.
The impact there on variable versus fixed. coicy mentioned share-based boun that was driving the majority fit on the fixed side. Could you touch on the outlook in an inflationary environment? Do you expect to keep costs the low year assumptions or should we expect over the medium term an unfavorable revision to your expense outlook or less favorable expense experien as inflation weighs on your results?
ok morning nge, let's manage it. So, in terms of the composition of the expense experience in the quarter, I would say about two thirds of that was on related to variable compensation, though I spoke about earlier. I mean in terms of inflation viously, you know we're getting some of the general impact that you're seeing in the overall market, but not at the sort of the headline levels that you sort of see in the media: 9, nine or 10%. It's more in pockets. You know certain areas like tech, technology and data specialist. We're seeing more pressure on that side. But, as I spoke about earlier, we also are having opportunities to drive expenses lower by productivity initiatives. We've done that for many years and we're continuing to focus on that. So overall, we feel we can manage our expenses, continue to manage our expenses ahead of our revenue growth.
That's helpful and the I does Fin ish off with the impact of investment activity. Components of your experience this quarter. I mean it continues to be favorable. Just trying to get a sense of how does that correlate with interest rate volatility or spreads volatility? So we expect that favorable experience that continue until spreads and interest rate stabilizede, or what's the right way to think about that lineup?
meankevin, do you want take that, Kevin morarton?
Sure and I going it's cov more but the activity, as you know, is very strong. Then this quarter we had gains of about 36 million. There's a number of different factors that impact that. In position to the flows and the market environment. I'd say that we positioned our portfolio to have a amount of reserve to take advantage of favorable market positions that we're seeing some of that come through the quarter. It also has to do with kind of the deals that we're doing in the flows of those, these of the size of our new business in each quarter, depending on how much we're backing against new business and how much we're back in the against-en-force. So I'd say that our outlook continues to be favorable relative to our 10 to two million per quarter guidance.
ok appreciate that COL, Thank you.
We have no further questions at this time and I will turn things over to turbedent 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. I will now turn the call over to Kevin strain for closing remarks.
Thanks eve. We remain focused on our purpose and our strategy. Our diveried mix of business, strong risk management, balance sheet strength and capital position are helping us managing through what's clearly challenging times. You can see steps across each pillar and across all elements of our strategy that continue to move the business forward. The close of denttoquest, our strategic partnership with Phoenix, reviewing our distribution relationships with renewing our distribution relationships with our CBC, and gaining traction on sustainability and digital leadership were all steps we took in the quarter to continue delivering for our clients, our employees and our shareholders. I want to thank everybody for jouring the call and wish you all a great rest of the summer.
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