Q2 2022 Sun Life Financial Inc Earnings Call
[music].
Okay.
Welcome to Sun Life's earnings call for the second quarter of 2022.
My name is Denise 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 Sun life Dot com.
We will begin today's call with opening remarks from Kevin strain, President and Chief Executive Officer.
Following Kevin Dan Fishbein, President of Sun Life U S will provide an update on the debt the quest acquisition.
<unk> 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 two I draw your attention to the cautionary language regarding the use of forward looking statements and non <unk> financial measures, which form part of today's remarks.
As noted in the slides forward looking statements may be rendered inaccurate by subsequent events and with that I'll now turn things over to Kevin.
Thanks, Judy and good morning, everyone.
Before I get into the quarter I want to discuss the agreement we announced earlier. This morning the style our closed block of business in the U K, the Phoenix group for approximately $385 million.
The economics of the transaction related to our UK life and pension business, which has been running as a closed block since 2001 Phoenix is the uk's largest long term savings and retirement provider. They have the scale and expertise to run close life and pension businesses and we're 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 SLC management will continue to manage approximately $9 billion in the U K General account on behalf of Phoenix. He will also become material partners to Phoenix supporting their goal to invest.
Approximately U S 25 billion in North American public and private fixed income as well as alternative investments over the next five years.
Phoenix had over 310 billion pounds Sterling and assets under administration at as at December 31, 2021, with a strong track record of growth in the last five years alone.
There.
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 and markets with natural tailwind. The transaction also supports growth in our asset management businesses.
On closed sunlight will release capital held to the for the life and pension business, we estimate a like a benefit of 1% to 2% associated with the Capa release. However, the final amount will be determined on close.
Sun life 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 sunlight capital perspective, we expect that this business will generate approximately $30 million of annual underlying net income after the transaction close.
In the first half of 2023.
I wanted to take this opportunity to thank our team in the UK for their passion and dedication to Sun life and important part of our decision making process included finding a company where are you in key employees could continue to grow and develop their careers and we believe we have done so with Phoenix.
Turning to slide five we provide 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 $892 million was up modestly management 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 $10 million in earnings in the U S for dental quest.
This happened after the close on June the first these positives offset lower fee income at MFS, driven by equity markets and a relatively inline quarter in Asia as Covid related restrictions continue to impact the Hong Kong business.
Capital also remained solid in the quarter with 128% like cat for Esol, App and 124% for SLA.
Slide six highlights several strategic initiatives from the quarter that support our client impact strategy.
This quarter, we expanded our commitment to sustainability as SLC management fixed income business signed up to the net zero asset managers initiative, joining previous commitments made by other SFC affiliates, including dental Greenough Biggio and infrared in Malaysia, We launched the first Sharia compliant investment linked tactful.
<unk> 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 bancassurance partnership in the Philippines with RCB C. One of the country's leading commercial banks the <unk>.
Partnership was renewed for an additional 10 years and will continue to provide our CBC clients with access to financial protection products.
We also saw another quarter of strong momentum at SLC management with capital raising of $5 7 billion in the quarter, we're seeing good traction across all asset classes offered through our diverse alternative investments platform, including Biggio, where investors are pivoting to debt secured by real estate to provide protection against current.
Gnomic conditions.
And our position as a trusted brand was recognized this past quarter by corporate Knights magazine, which once again included 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 addition ranks as 21st overall driven in part by strong scores on executive general diverse.
City Board racial diversity and sustainability linked to executive pay side.
Slide seven provides highlights on our digital leadership.
By focusing on digital priorities and continuing to develop our operating model, we are making great progress in our digital journey in Canada, Our digital coach Ella continues to help clients make better decisions driving year to date increases in both wealth deposits and insurance coverage, which were up 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 submissions of new business applications up 13% over the prior year.
I'm also excited to welcome Chris way to Sun life, as our executive Vice President and Chief client and Innovation Officer reporting to me, Chris joined our executive team in this new Global Cross enterprise role, leading Sun life's commitment to client experienced excellent 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 Delta Quest. We're excited to have <unk> joined the sunlight family.
Thanks, Kevin I am pleased to provide an update today on them to quest since closing the acquisition on June 1st with the addition of Dent to Quest sunlight is now the second largest dental benefits provider in the U S by membership and we now serve more than 50 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 transformed the U S business from a mostly retail individual life and annuities business to a high performing market leading benefits business. The <unk> acquisition continues this evolution changing the footprint of our business in the U S into a larger more healthcare focused organization now with more.
70% of our benefits revenue coming from healthcare.
These changes have transitioned Sun life U S from a capital intensive to a capital light business with strong cash flow generation from businesses with long term risk profiles to mostly short term risks and fee based businesses from slow growth markets to higher growth markets and from our Oes in the single digits.
Our return on tangible tangible equity in the high teens, the dental <unk> acquisition adds a large and growing business that align 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 help.
People live healthier lives, we welcomed 2400 dent to quest employees to the sunlight family on June 1st the leadership team for the dental business is in place consisting of a blend of dental question sunlight leaders and is focused on growth strategies revenue 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 out our accretion and cost savings targets for shareholders, creating new opportunities for our employees and delivering a positive integration experience for.
All we 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 dental quest integration.
We are focused on integration activities that will support our run rate cost savings target of U S 60 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 them to quest, both the government and commercial segments and the existing Sun life U S dental and vision business. The second quarter includes one month of results for dental request and three months of the legacy Sun life dental and vision results.
I am excited about the future at Sun Life U S. We now have four strong businesses with market leading positions in dental in 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.
That's 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 manage it.
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 the 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 $1 52 were up 1% from the prior year.
Good insurance sales moderating COVID-19 impacts strong credit results one month of earnings of identical acquisition and disciplined expense management helped to offset lower asset management results.
Underlying return on equity was 14, 9% in the quarter.
Book value per share was up 6% over the prior year and excluding the impacts in other comprehensive income book value per share was up 10%.
We continue to maintain a solid capital position with Logcap ratios of 128% at <unk> and 124% at SLA.
Decline the SLR ratio from last quarter, primarily reflects the closing of identical acquisition and market impacts in the quarter.
Now, let's turn to our business group performance, starting on slide 13 with MFS.
MFS reported net income of <unk> $228 million up 19% from the prior year, reflecting fair value changes and outstanding share based payment awards.
Underlying 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 pre tax net operating margin of 36%.
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 and U S $5 5 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 saw lower relative retail redemptions as a proportion of AUM compare to the industry and.
Institutional inflows were U S $1 5 billion in the quarter.
Yeah.
Turning to slide 14, SLC management delivered another solid quarter with reported net income of 5 million underlying net income of $23 million.
Underlying net income reflected strong growth in fee related earnings, partially offset by real estate investment mark to market losses.
The 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 of $5 7 billion in 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 $175 million.
On Slide 15, Kansas reported net income of $160 million was down from the prior year, mainly due to market related impacts.
Underlying net income of $344 million was up 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 group benefit sales in standby power and solid growth in third party insurance sales.
While sales were supported by higher large case mandates in 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 million was up 30, 31% from the prior year, reflecting real estate gains.
Underlying net income of U S $121 million was up from <unk> $93 million in the prior quarter, reflecting one month of earnings from <unk> and more normalized group life mortality.
Group life mortality significantly improved in Q2 in line with improvements in the overall population.
We also saw some moderation of that favorable stop loss morbidity experience in the quarter, but inpatient utilization remains below pre COVID-19 levels.
Our U S business continued to demonstrate strong core fundamentals with solid growth in premiums and fee income good client persistency and benefits from investments in clinical care and enter quest.
Slide 17 outlines Asia's results for the quarter.
Reported net income was $131 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 was 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 and the high net worth market.
Outside of Hong Kong and International insurance sales grew double digits and the rest of our markets as they emerge from pandemic restrictions.
Asia wealth sales were lower than prior year, reflecting declines in global equity markets.
Overall, we were pleased with our results this quarter some lives 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.
And the investments we have made in recent transaction transactions, including in SLC management Dent to Quest and bank assurance in Asia are performing well and contributing to results.
With that I'll turn the call back to you need for Q&A.
Thank you manager 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 now ask the operator to poll the participants.
Okay.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Speaker phone please pickup your handset before pressing Vicky.
Anytime Youre question has been in jazz and you would like to withdraw your question. Please press the tide in queue. At this time, we will pause momentarily to assemble our wellcare.
The first question comes from mainly ground line.
<unk> Bank. Please go ahead.
Hi, good morning.
Question about Asia, it looks like Covid, North Americas, putting COVID-19 behind and we saw the improvement in the U S. But.
In Asia, It looks like Covid related restrictions continue to be a factor and this quarter. We saw it in Hong Kong I'm wondering what the outlook looks like or what youre seeing so far in Q3, but then even beyond that.
Do you expect any material change in in Covid related restrictions or is this going to be a persistent issue over the foreseeable future.
Thank you very much for the question anything good Johnson from Asia of actually just.
Almost fully touring Asia, and Wayne to almost all of our markets other than India, and China, and it's exactly right. The rest of Asia is actually opening up really nicely, whereas Hong Kong is still facing some of the restrictive measures.
Thanks, Sierra Covid policy.
Under the new Chief executive that is being evaluated.
Okay.
And you're correct, we do see that application flow stream, Scottsdale and credit to deal with the border closed.
<unk> zero sale basis in 2016, it was at its highest 9 billion and it was the highway.
All of our competitors then.
Being able to ramp that business that we are seeing increased competition domestically in.
Okay quarters of contraction of GDP.
There is no doubt that.
Need to change, we're not sure when but we are preparing and making sure we build a really great position.
Positioned.
To take advantage of with restrictions.
If the zero policy zero Covid policy continues are there any changes you can make to that business or anything you're contemplating to to adjust to that ongoing reality.
And importantly, the ability to pay.
The market volatility that has been globally going on.
In terms of.
<unk> will have a very strong position that rule with.
Estate position, so we very strongly in the wealth business and that we will continue and the business is very well positioned.
Third time, Shira Goodman momentum, so we feel that we're well positioned to sun life with a global positioning that we wanted to strengthen our offerings in Hong Kong.
We are cautiously optimistic and we do believe that Hong Kong will be made at some point and we will be well positioned to take advantage of that.
Thank you Andrea.
Okay.
Thanks.
Got it I appreciate that.
Okay.
Okay.
Our next question comes from Tom Mackinnon BMO. Please go ahead.
Yeah, Thanks, very much and good morning.
With respect to Dan at Quest.
Is it possible that you might be able to share with us the underlying earnings that are data quest contributed in the one month that you had it in the second quarter and a follow up.
Sure. Tom This is Dan Fishbein in U S dollars the underlying earnings for dental request in the one month was $10 million.
Okay. That's great. Thanks, and then the follow ups with respect to corporate.
Just wondering how that might trend.
And underlying earnings loss of $35 million.
It's still going to be higher year over year, I assume thats from increased debt.
Just wondering how that.
Might trend going forward until you sell the until the close of the U K block.
And then when the close of the U K block happens I think.
You would lose another $40 million in annual earnings.
And would that be.
In that corporate block as well, so just a little bit of color there. Thanks.
So good morning, Tom its mandate.
The corporate earnings as you now include a number of factors. So they do move around a little bit quarter to quarter. This quarter, we did benefit from favorable expense experience largely in the corporate segment. So that's what's 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 size that would be about $40 million you outlined.
The $40 on an annual basis.
That's right.
<unk>.
I think you had mentioned before that after dividends and investment in the business to generate excess cash.
Capital of about $1 billion annually does that change at all with this divestiture.
No I don't think that changes materially after the divestiture as we said the $40 million.
A relatively small number and as you know as part of the transaction, we are freeing up capital and obviously, we will use that capital to generate additional earnings and Tom. It's Kevin of course, we've also entered a strategic management partnership with with Phoenix, and we expect that we will get a good chunk of the.
25 billion Theyre planning to deploy over the next five years into the North American sort of asset management space and that will provide.
An income stream that will make up some of the lost revenue so deploying the capital we get back and also the asset management agreement are in combination I think.
Good support to the earnings.
Okay, and how much do you expect to get on that 25 billion.
It's going to it's going to in terms of it is going to emerge over over the next five years and you might even say it would emerge sort of.
Pieces over the five years. So you can look at as 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 it's.
It's hard to say exactly what the timeline will be there is a process and a fiduciary responsibility they have for bringing them on but you will see that earnings emerge and we expect 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 the closed block.
For the life and pension business that we sold we expect that that was going to decline quite significantly over the next five to seven years, whereas the payout annuity business that we're keeping.
We expect to be fairly stable from an earnings perspective, and cash flow perspective.
Okay. Thanks for that.
The next question comes from Scott Chan.
Canaccord Genuity.
Please go ahead.
Good morning.
My question is actually a follow up for Tom.
I know, it's one month, but Dan is there any seasonal impacts on that business more like a $120 million annual run rate is.
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.
Ricky.
Can't 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 than perhaps we expected and a little lower revenues, but the higher margins were more than made up for the.
Small.
Variance in revenues, but overall I think.
The comment we would make us at least this first months gives us confidence in our prior projections.
And then if I take that first month, and just annualized that and just doing quick math it seems like your.
The earnings powers.
Lower when we announced the deal.
And could be some risk to that.
Accretion targets or is that not the case.
That's not the case the accretion target we announced wood.
Would actually translate to a number a little bit lower than the June number.
Okay got it thank you.
Okay.
The next question comes from Doug Young with Desjardin capital markets. Please go ahead.
Hi, Good morning, Dan on the U S group insurance business underlying earnings were down.
Year over year, and I know, there's puts and takes in here, but ultimately just hoping you can flesh out some of those puts and takes.
We look at that and I know the LTM margin was four 7% I know you're targeting 7% plus I know.
Envision business has been stripped out so its not really comparable.
Wondering is there a new target.
For the margin for that U S group insurance business you can share.
With that with us.
Okay. So few questions there.
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 continued 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 a very strong quarter in long term disability and.
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, our rolling four quarters metric so partly what youre seeing here is looking back several quarters. The current quarter was actually quite strong, although again compared to a very strong quarter last year. So we actually swapped.
Out a very strong quarter for <unk> not quite as very strong quarter. This year, but that's a that's a four quarter metric that will obviously improve over time in terms of the margin target 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 include.
Dental quest and margin. We've concluded is not really the best way to think about the dental business, especially in comparison or in combination with the other group businesses.
Dental businesses competitively have relatively low margins and thats because they have very high Roe.
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. Our margin target remains the same as it has been which is 7% or more.
And just a follow up when you when you think about getting from $4 seven backup to seven is it more on the group life benefits life and health business or is it on the stop loss like where do you see southwest still above that 7% coming down in the group life will help maybe an up or has there been a change in that chip.
Stop loss is still above <unk>.
<unk> group is still below.
While Covid incident, and certainly has improved dramatically there is still our COVID-19 impact in the business and you see some of that a little of that in long term disability.
Certainly there is especially over the past four quarters, there is still quite a bit in mortality there.
But.
We would see a stop loss may even.
Drift down a little bit as some of the favorability from delays in care gradually moderate.
On the other hand, we would expect group life and group disability to go back up as the Covid impacts fade away.
Okay, and just second Kevin on the sale of the UK.
Yes. The question was why retain the annuity business. Thank you covered a little bit about that but is this also a play on you might keep longevity to offset the build out of the life insurance business and when you think about deploying capital can you remind us what are you focused on in from an acquisition perspective, when you're focused on.
Yeah. Thanks, Doug So it is a it is a bit about we like the risk profile of the business, but we've optimized that business for our book and under our FY 17, you actually see a slight growing pattern over the next 10 years to that earnings and the earnings almost come back, 100% or maybe even up more than a 100% in cash flow and it's got a very good Roe. So.
We like the risk profile, we like the structure of it and.
It helps all of our three medium term objectives of course, when we're thinking more broadly about M&A. That's what 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 that help.
Our three medium term objectives. So is it accretive is it helping our earnings growth is it isn't supporting the ROE 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 little while you've heard Dan now talked about 10 to class, but you've seen the benefits of adding the SLC businesses in the bank assurance in Asia. So it's it's really about those things are we are we adding to our strategy.
Are we meeting our medium term objectives and can we execute on the on the integration.
Thank you.
The next question comes from Andrew or Shane National Bank Financial. Please go ahead.
Hi, Good morning, just a follow up on that you see.
What's the underlying.
The lithium business.
It would be approximately the 30 that I talked to our gave during the during my opening remarks.
$30 million, but it's also.
Yes.
Potential trends.
Mortality side or the other way.
Okay.
You could still have much more material.
In the future.
I'll, maybe ask Kevin to speak to the reserve releases, but it's in the 30 is under an <unk> 17 basis.
Great.
Hi, David It's Kevin Morrissey.
Experience has been quite good.
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 methods of managing the investment risk with very little kind of net residual risk there and we'd like to turn the profile as Kevin mentioned of the business and the cash flow coming out of that so yes. There is.
Certainly some potential upside on that business as well.
While I got you Kevin.
Well the U S life insurers.
The charge for.
Lapse rates.
No lapse guarantee business lineup there.
Selling anymore, you got it on your run off block.
Confident in those reserve levels I believe you would have been more proactive over the years.
Identifying.
Loss trends.
Yes, that's right Gabe.
No we've been very keen to focus on that experience and make update and the assumption reviews annually to make sure that we got.
I got that right up to the most recent experience last year, we did strengthen we've been monitoring that since been happy to report that since that change last year.
Spirit has been fully in line with that last update so.
Looking at over the last several quarters and we don't anticipate any further changes to the lapse assumption on that block.
Okay, and a last quick one.
Yes.
The 21 billion, that's not yet been deployed in the revenue perpetual attached to that.
What's the forgive.
Forgive me if this has been asked already but.
The timeline is expected to deploy the capital.
The investment capital.
Yes, Gabriel it's Steve Peacher, Thanks for the question.
$20 billion 21 billion reflects the nature of the alternative investment business, so across our real estate alternative credit and infrastructure businesses. We've raised closed end funds and the capital gets committed by institutions.
And it gets too early and we draw on it and it gets deployed in some cases, we earn 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 towards the end of the investment period somewhat be money, we just.
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 and a series of 7%. A series. You also have funds that are at the end of their life Center disposition mode.
So youre always raising new funds, you're investing some are rolling off but I would say to your question that 20 billion should get invested on average over the next year.
Okay.
Thank you and enjoy the rest of your summer.
The next question comes from Mario Mendonca with TD.
TD Securities. Please go ahead good.
Good morning, everyone.
Can I just ask a little about.
Experienced policyholder experience like the underlying experience.
Any big shift from Q1 to Q2.
What I'm trying to get a better appreciation for is the.
The extent to which that that move from say negative mortality of 90 and morbidity.
<unk> and <unk>.
And also on other lines.
How that moved from a charge in Q1, two meaningful gain in Q2 and the way the way I want to approach. This is if you can.
Help me think through what portion of that is just truly actually just different mix different results of 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 its actual and how much of it is really a change that the expectations were different for Q2.
Okay.
Okay.
I might actually step in Marriott's, 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 Jacques talk about the disability experience in Canada. Because that was also a big piece and Dan you might want to touch on disability as well and then if we still have some open items to wrap up.
I think either mandate or Kevin or I can come back at the end.
Right.
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 one.
A little bit the other way at least compared to the quarter of the prior quarter in the prior year.
As well as sequentially, but thats just the nature of the volatility in that business, but the really big change was.
A great lessening in the Covid mortality from Q1 to Q2.
Our 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 youre seeing there it was not a change in expectations that blends in very slowly between first quarter and second quarter. There would be very level change there was actually a very big change in the mortality experience.
Chuck.
Okay. Thanks, and then Mario this is Jack.
Material change in Canada morbidity.
That is driven mostly by group visibility experience and frontline health.
So I'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 or short durations are before people go back to work.
Positive experience in both Amsterdam and duration.
Keep in mind also Mario that starting in 2019, we started putting price increases through the work and that is also impacting.
So.
At this stage, it's hard to say because we have one data point of Q2 being a good experienced quarter.
And I would be cautious to declare this a new trend there was a lot of things that influence incidents. For example, so strong area of focus as we've had in a number of quarters now as you know and we're continuing to add 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 the comparative quarters that Youre talking about Mario and so you can see that this in a way is us taking management actions in the case of <unk> and then a big change in the Covid death rates in the case of the U S business that youre 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 desk now are I think roughly in the 300 to 400, a day in the U S and they had been running at close to 3000 a day.
And then I think Jon answered the morbidity question.
Yes, I think that I think I understand now that actual changes in management actions.
What are the drivers not any big change in expectations, perhaps.
A final sort of line of questioning in this respect the expense side turn real positive this quarter. The 44 was that a management.
Management action Alright change that resulted in that that gain I would imagine that's less about expenses as well or sorry, less about expectations as well.
Yes, Hi, merits management, yes, I think theres a couple of elements in there. The one element is around management actions. We as you know we've always had a very keen focus on expense discipline, we're keeping that focus all of our businesses are focused on driving our productivity inside of their businesses and that's resulting in slightly lower expenses than we thought and the second element is obviously given the.
The moves that we've seen in the markets.
Some of our share based compensation expense plans, there is downward downward impacts of that so it's a combination of those two things okay.
Okay, and then maybe just one final thing if we could go to the contract service margin I think the company is guiding.
I'm doing this by memory I think it was $4 $5 billion or is that right is it four five or $5 billion in contract service margin.
The $4 5 billion was the adjustment to our shareholders' equity on one $1 22.
I'm, sorry did you say that most of that related to establishing the contract service margin, but would I be correct in saying the contract service margins should be youre guiding us there, maybe $4 five or am I, not reading too much into that yet.
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 on May 31, We said about two thirds of the shareholders' equity adjustment. We gave you would be a part of this contract service margin. There is also another element, which result, which which is related to the change in how we present the liabilities and that info.
<unk>, we haven't provided yet.
Okay. So the contract service margin.
In fact, the less than $4 5 billion is that true.
Well, we Havent said that but I would I would I would say, it's going to be more than the $4 5 billion.
Okay.
Got it thank you.
Okay.
The next question commentary David Martin.
With Evercore ISI. Please go ahead.
Hey, Thanks, good morning.
I had a question just on the UK business on the the bit that was retained could you just describe I guess why you are retaining that.
Is that something you can consider.
Exploring something similar with <unk>.
Transaction on in the past or is there is there something about it that made it that Phoenix didn't.
Keith maybe just some color on on why you didn't sell the.
The business as opposed to retaining the annuity business would be helpful.
David This.
This business has been optimized to.
Our business in our sort of capital structure.
As Kevin said, we like the risk profile as it fits well in.
And as I said earlier, we we like the earnings and cash flow in a row that are coming off of it.
It was one overall that as we were doing the transaction, we decided we'd rather.
Keep then sell.
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 other thing I would add if we look at the returns on this business given kevins comments about how we structured it is 20% plus so we're very happy with.
The returns we're getting on that business.
Okay, Great and then maybe just taking a step back and I think in the past it didn't sound like you guys are in a rush or had really focused on trying to do something more strategic in the U S on that enforce management business.
Has that changed is does this transaction.
That you did with Phoenix on the U K.
Was that more of a one off to get the asset management agreement or is there something broader initiative that you guys are starting to think about in terms of just getting.
Yes, maybe potentially offloading or doing something more strategic with the in force management business.
David It's Kevin again, if you looked at the life and pension business that we sold again.
That bought closed in 2001, and we're expecting income to start to decline in cash flow to decline and at some point you start to lack scale in.
In the <unk> 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 <unk> business is a bit like the payer business in the U S. We like the profile of it we like the earnings and the cash flow coming out in the row.
So.
That's how we're thinking about that if you watch there is a number of asset management companies that are buying these closed blocks for the cash flow and so that's strategic for us to provide that that cash flow back to <unk> as well.
Got it okay that makes sense. Thank you.
Okay.
The next question comes with comes from Paul Holden with.
CIBC. Please go ahead.
Hey, good morning.
I want to go back to the U S group business, because there's just been a lot of moving pieces over the last.
For a 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 to which youre growing stop loss the price increases you've been pushing through or maybe theres factors that would suggest don't get too excited maybe.
Maybe it's going to be a little bit less than 10% in the near term maybe you could talk through some of those dynamics for us.
Well I'm always excited about their future so and an optimist. So you may have noticed that even without the addition of dent to quest and clinical care.
The premium and fee revenue of the U S rose by 10%.
In the past year. So we are clearly generating significant organic growth and that should translate into.
Earnings growth as well now turn to quest is has been a growth engine.
<unk> its history it had.
<unk>, a 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 to quest, where they show.
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 theres a lot of potential in the dental quest 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 in 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, we have lots of optimism for what we can do in the group business as you probably noticed after several years of that business being relatively flat the past year and a half. It has really started to grow organically. So we're confident in the 10% number and certainly I always.
I think there is upside.
Okay fair enough.
Great answer thank you and I think things have been pretty quiet for Mike <unk>. So I'll ask a question on MFS. 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 usually it's worked the opposite way with higher equity markets. So wondering.
I was just institutional clients, taking or really I guess rebalancing portfolios, adding more equity or if there was something more to it.
Hey, good morning, this is Mike.
I think.
Institutional flows do tend to be somewhat lumpy and there were just a number of wins that funded in the quarter.
Some of that would've been rebalancing, but I think it was just activity the client level, where we lined up well with those particular opportunities and they happened to fund in that particular quarter. So.
That's really what drove that sort of the color behind the institutional flows.
Okay, and then just a quick follow up I mean is there any sense you can give us given the current pipeline today, and where things might land in the <unk> in the future.
Yes, I mean, we don't comment on pipeline looks like and 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 and the size of the mandates that they're putting out so.
Im not comfortable giving a forecast okay.
Okay I had to try.
Okay. Thank you.
Thanks I appreciate it.
Okay.
Next question comes with comes from Nigel D'souza with Veritas.
Please go ahead.
Thank you good morning, I wanted to follow up on experience and.
Yes, typically on the expense side I mentioned earlier, the delta year over year on expenses, it's pretty significant.
And I'm wondering if you could flesh out.
The impact there on variable versus fixed costs, you mentioned share based comp is that what's driving the majority of it.
Could you touch on.
The outlook in an inflationary environment do you expect to keep costs below your assumptions or should we expect over the medium term.
An unfavorable revision to your expense outlook or.
Less favorable expense experience as inflation.
Weighs on your results.
Good morning, Nigel it's manage it so in terms of the composition of the expense experienced in the quarter I would say about two thirds of that was related to variable compensation.
I spoke about earlier and then in terms of inflation, obviously, we're getting some of the general impacts that youre seeing in the overall market, but not at the sort of the headline levels that you're sort of seeing the immediate nine nine or 10%. It's more in pockets you know certain areas like technology and data specialists, we're seeing more pressure on that side.
As I spoke about earlier, we also are having opportunities to drive expenses lower by by productivity initiatives, we've done that for many years and we.
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.
Okay, that's helpful and if I could.
Softwood.
This investment activity component experience.
This quarter I mean.
To be favorable.
How does that correlate with interest rate volatility or spread volatility. So we expect that favorable experience that continue until spreads and interest rates stabilize or what's.
What's the right way to think about that line item.
Yeah.
Kevin do you want to take that Kevin.
Sure John It's Kevin Morrissey.
Activity.
Very strong again this quarter we had.
Gains of about $36 million.
There are different factors that impact that in addition to the flows and the market environment I would say that we positioned our portfolio to have some amount of reserves to take advantage of favorable market conditions that you're seeing some of that coming through in the quarter.
We have no further questions at this time I will turn things over.
Jim <unk> 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, Steve.
We remain focused on our purpose and our strategy our diversified 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, but close a dent to quest, our strategic partnership with Phoenix.
Reviewing our distribution relationships with renewing our distribution relationships with our CVC and gaining traction on sustainability and digital leadership. We're all steps we took in the quarter to continue delivering for our clients our employees and our shareholders I want to thank everybody for joining the call and wish you all a great rest of the summer.
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