Q4 2022 Sun Life Financial Inc Earnings Call
Okay.
Good morning, and welcome to the Sun Life Financial Q4, 2022 Conference call. My name is Michelle and I'll be your conference operator today, all lines have been placed on mute to prevent any background noise.
The call is a neat fitting vice president head of Investor Relations and capital markets. Please go ahead Mr. Baeten.
Thank you operator, and good morning, everyone.
Welcome to Sun Life's earnings call for the fourth quarter of 2022, 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 Magic thing Executive Vice President and Chief Financial Officer will present, the financial results after.
After the prepared remarks, we will move to the question and answer portion of the call.
Other members of management are also 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, Steve and good morning to everybody on the call turning to slide four satellite delivered strong performance during the fourth quarter contributing to solid 2022 full year results. Our results demonstrate the resilience of our diversified business model and the commitment of our people to deliver strong earnings and continued growth amidst a challenging environment while meeting.
Our commitments to clients and delivering on our purpose. We've made tremendous progress on our business strategy by driving positive client impact for 85 million clients around the world.
We achieved strong underlying earnings this quarter of $990 million Canadians, representing 10% growth over prior year, demonstrating the resilience of our business mix our growth was driven by strong results from our protection and health businesses.
Sunlight U S had a strong fourth quarter underlying earnings as a result of solid underwriting performance in health and risk solutions significant moderation of Covid related impacts and contributions from dental quest in Asia. We saw a breakthrough in earnings profitability in Vietnam, driven by the addition of a scale of scale in bancassurance.
And in agency and we saw higher margins in our international high net worth business.
Strong results from our protection and health business were partially offset by lower income and increased outflows from our wealth and asset management businesses, largely reflecting declines in global equity markets.
Underlying ROE for the quarter up 15, 7% continues to trend towards our medium term objective of 16% plus reflecting our disciplined capital management and growing emphasis on capital light businesses, Andrew I can't ratio ADESA left remains solid at 130% for the quarter.
Turning to slide five our full year 2022 results were driven by similar factors as seen during the fourth quarter underlying net income increased 4% to $3 $7 billion supported by growth in our health and protection businesses underlying ROE for the year was 15, 1% was also strong.
Over the past year, we increased our quarterly dividend by 31% following the lifting of restrictions in November of 2021.
Turning to slide six this quarter, we delivered on several key business initiatives that helped drive forward our client impact strategy the strengthening of our distribution capabilities in growth markets has been a priority for Sun life in 2022.
In fact, it sounds like Asia, we remain focused on building quality distribution channels, we realized a step change in our bancassurance distribution over the last 12 months, driven by new marquee relationships and executing on our existing partnerships.
Last month, we announced our first exclusive bancshares partnership in Hong Kong with Tossing Bank under the 15 year agreement Sun life will be the exclusive provider of life insurance solutions to <unk> retail banking customers with distribution of sunlight products expected to start this summer.
This rounds out our distribution capabilities in Hong Kong and positions us well to compete.
With the addition of this bank assurance partnership in Hong Kong, We now have more than 20 quality bancassurance partnerships in seven markets across Asia, our history of execution in Asia has proven its strong bancassurance distribution, coupled with high quality adviser channels provides a critical platform for growth.
One example of this is how we're building our business in Vietnam executing on transformational bancassurance partnerships with a focus on providing high quality insurance and wealth products and services to fit our clients' needs. We are now one of the fastest growing life insurance players in Vietnam, We've improved our market position for insurance sales from 15th.
<unk> and the full year 2020 to six position in 2022.
At SLC management, we also recently closed our acquisition of a majority stake in advisor asset management.
Advisor asset management or a M adds distribution capabilities in the U S high net worth retail market one of the fastest growing distribution channels for alternative assets. We're excited to welcome a M. M. M. M team to our SLC team, we are increasingly delivering positive client impact by elevating our focus on health helping.
Clients access health care and coverage and the coverage that they need.
In the U S. Dental quest continues to expand its dental business advancing our goal to increase access to oral healthcare and underserved communities in Q4 to enter quest expanded its advantage dental plus care practices with four new offices in Florida. These practices went through start startup to add capacity in.
90 days, which demonstrates the need for these services.
<unk> also had a strong quarter for contracts awarded including two new dental managed care contracts from a multi state health plan provider. The two newest contracts expand that partnership with that with the health plan to 10 states denser.
Hence the question unique capabilities continued to contribute to our ability to win and retain state business, while also driving higher margins.
Additionally, the COVID-19 pandemic has exacerbated the mental health crisis in Canada. We know many people are in a breaking point and we need to offer more easily more resources and more access to tackle. This crisis. We know the workplace is an important place to address these concerns and we're doing our part in Canada by providing.
Clients with better access to mental health solutions we.
We're also doing our part in our communities and last month, we announced an investment to support mental health programs for at risk marginalized youth across Canada, continuing to build capabilities that will expand access to care will support Canadians with early prevention and with faster recovery.
We continue to make great strides in our digital journey.
Tied to our commitment of increasing financial security, we continue to work hard to build the capabilities such that our clients can access our spectrum advisory options through a frictionless digital experience sunlight, Canada has created more than 65000 financial Roadmaps for Canadian clients in 2022, using our sunlight one plan digital.
Tool Sun life, one plant contributes to our goal for all Canadians to have a financial plan.
Finally, we continue to be recognized for our progress in sustainability and our inclusive culture.
Sun life was recognized by corporate Knights as being among the global 100, most sustainable corporations in the world for the 14th consecutive year and this year, we were the top ranked insurance company globally.
Additionally, Sun life received many employer awards in 2022, including being certified as a great place to work in several of our markets. This is especially gratifying because it's the result of direct feedback from our employees.
This is recognition of our focus on ensuring we have an environment, where diversity is championed in addition to offering resources and flexibility to support mental physical and professional wellbeing.
Before turning to manage it to detail our Q4 financial results I'd like to share a few final thoughts first I'm excited to welcome Tom Murphy, our new Chief risk officer to the sunlight executive team. Some of you will know Tom from his time with SLC management.
Where he headed up our fixed income institutional business Tom.
Tom brings a global depth of knowledge and experience, particularly in asset management in the pension space, which will be a tremendous benefit for all of US I'd also like to recognize Colm freyne. Many of you on the phone will know him from his time as the sunlight CFO and then as our Chief risk Officer, Colin will retire on May 1st after an illustrious 'twenty.
Year career with Sun life. He has played a significant role in our companys growth over the past two decades on behalf of everyone at Sun life I want to thank Tom for his service to Sun life and wish him well in his retirement.
And lastly, I'd like to share a few thoughts on the year ahead.
While we expect the environment to remain challenging we are optimistic about the outlook based on recent direction of travel for inflation in North America, we're seeing most economists forecast.
Forecasting a plateau of interest rates in the back half of 2023 with some showing reductions in interest rates in 2024, we expect some volatility in rates will persist, but this will likely be within a tighter range, while inflation looks to be moderating we continue to watch the environment, including geopolitical uncertainty.
Additional shocks the energy supply the reopening of markets in Asia, and COVID-19, we continue to feel prepared as a result of resilient client impact strategy supported by our diversified and capital light business mix reached.
Recent investments across growing spaces in health asset management in Asia, and our sustained commitment to delivering on our purpose to help clients achieve lifetime financial security and live healthier lives will all support US next year with that I will now turn the call over to manager, who will walk us through the fourth quarter financial results.
Thank you Kevin and good morning, everyone. Let's begin on slide eight which provides an overview of our Q4 results.
Sun life had a strong finish to the year with record underlying earnings in the fourth quarter, reflecting the strength of our businesses and the benefits of our diversified mix.
Underlying net income of $990 million and underlying earnings per share of $1 69 were up 10% from the prior year.
<unk> results in protection and health businesses were underpinned by business growth the contribution from dental Crescent acquisition higher margins in the U S and Canada and moderating COVID-19 related impacts.
This was partially offset by lower wealth and asset management results, which were impacted by global equity market declines.
<unk> net income for the quarter was $951 million down 12% from the prior year.
The results for this quarter include market related impacts and enter quest integration expenses.
Our balance sheet and capital position remains strong as reflected by an underlying return on equity of 15, 7% for the quarter, a 5% increase in book value per share over the prior year, our strong capital position with a lot of cat ratio of 130%.
Up 1% from Q3, and a 130 basis points improvement in our leverage ratio from 26, 4% last quarter to 25, 1%.
Let's turn to our business group performance, starting on slide 10 with MFS.
MFS underlying net income of <unk> $202 million was down from the prior year driven by lower average net assets largely reflecting declines in global equity markets.
Reported net income of <unk> $223 million was down 5%, reflecting impacts on underlying net income partially offset by fair value changes on share based payment awards.
MFS generated a strong pre tax net operating margin of 40%.
AUM of U S 548 billion was up 8% from Q3, largely reflecting higher equity markets, partially offset by net outflows.
Retail net outflows of U S $8 3 billion in the quarter were impacted by industry wide risk redemptions as our investors remain cautious in an uncertain macroeconomic environment instead.
Turning to slide 11, SLC management delivered underlying net income of $38 million and reported net income of $19 million.
We are pleased with the attractive business fundamentals at SLC management.
This includes good momentum in capital raising across all asset classes, including $3 billion in the current quarter as well as 20% to 22% growth in fee related earnings, reflecting the deployment of capital into fee, earning AUM.
Total AUM of 210 billion were 14% were up 14% year over year. This includes $21 billion that is not yet earning fees. Once invested these assets are expected to generate an annualized fee revenue of more than $180 million.
Turning to slide 12 canvas underlying net income of 324 million was up 22% from the prior year driven by strong insurance sales improved disability performances on life health and higher investment gains.
This was partially offset by lower fee income and wealth management businesses.
Reported net income of $360 million was up slightly from the prior year.
Total protection and health sales were up in the quarter, reflecting an increase in large case sales and some might help.
On the wealth side retail sales were impacted by the market environment.
Group retirement sales increased year over year, reflecting our differentiated products and services as well as the strength of our client relationships.
Turning to slide 13 U S underlying net income of USD $177 million was up $121 million from the prior year.
Reported net income of <unk> $81 million was up $13 million or.
Our results were driven by strong performance across all businesses, including the contribution of Argenta crest.
<unk> benefit results were driven by a 16% increase in expected profit and a significant moderation of COVID-19 related mortality and disability impacts <unk>.
Business fundamentals remained strong, including good client persistency strong premium and fee growth and solid stop loss underlying underwriting margins the.
Our group benefits after tax profit margin increased to eight 4% sale.
Sales in the U S were up 11% year over year.
We saw good momentum in employee benefit sales, reflecting our investments in technology partnerships and new digital capabilities.
<unk> sales were lower reflecting a more competitive pricing environment.
Despite the change in competitive dynamic our focus remains the same provide value to our clients and maintain good pricing discipline.
We're very pleased with identical results. We are on track with our integration milestones and are confident that we will achieve our synergy targets.
<unk> delivered strong sales for the year, adding approximately 3 million new members in 'twenty, two bringing the total number of members to $36 million.
Slide 14 outlines Asia results for the quarter.
Underlying net income of 152 million was up 16% year over year on a constant currency basis.
The results were driven by insurance business growth and moderating COVID-19 related experience.
Wealth and fee related earnings were impacted by lower equity markets in Asia.
Reported net income of $98 million was down from the prior year largely driven by the gain from the IPO of our India asset management joint venture in October of last year and market related impacts.
Asia generated double digit insurance sales growth in most markets, we continue to gain momentum, reflecting the benefits of our continued focus on client experience rollout of new products and expanded digital capabilities as well as the easing of pandemic restrictions.
Incorporate underlying net loss of 39 million reflects a higher effective tax rate compared to the prior year. While reported net income was in line with the prior year.
Turning to slide 15, we outline the progress on our medium term financial objectives.
Despite the challenging operating environment and try and train two are resilient set of businesses delivered a 9% underlying EPS growth over the five year period.
Underlying ROE over the five year period was 14, 7% and 15 115, 1% for 2022, reflecting the shift in our mix to capital light businesses.
And the payout ratio within our target range of 40% to 50%.
We continue to maintain a strong balance sheet and capital position, which provides support to execute on our strategic provided priorities and is a key strength to manage through an uncertain environment.
Looking ahead to 2023, we remain optimistic about the fundamentals across each of our businesses.
While we expect the operating environment to remain challenging we are confident that our leading business positions focus on client outcomes disciplined capital and expense management and strong talent will help to drive continued growth.
And of course, this will be our final quarter under this will be our final quarter under the current reporting framework as we transition to <unk> 17 in Q1 2023 as.
As we've noted before <unk> 2017 does not impact our core business strategies or the fundamental economics of our businesses.
However impact the timing and presentation of our financial results.
Based on our parallel runs for the first three quarters, we have provided some updated disclosures this quarter.
First we updated the estimated earnings impact for the 2022 restated comparative year from a decrease of mid single digits.
Two a decrease of high single digits.
This is largely driven by higher investment activity gains for the year.
Our investment team has a proven track record of identifying and executing on opportunities to enhance the spread for our investment in volatile market environments like we saw for most of 2022.
The present value of the higher spread is recognized immediately into earnings under <unk> score will be recognized over time as we transition under <unk>.
The transition to our FY 2017.
While the economics in earnings benefit from the high yield is the same over time it results in a higher <unk> versus 17 difference our transition.
The second update is that we expect a high single digit increase in the <unk> ratio on transition to INR 17. This is higher than our estimates in may of last year, reflecting updates to our capital projections under the new <unk> guidelines as well as refinements of our estimates as we complete our quarterly <unk> parallel reporting.
We are currently in the process of finalizing our dual reporting for the 2000 trying to comparative year and look forward to sharing additional additional details in may with you with our reporting of our first quarter results with that I'll turn the call back to your need for Q&A.
Your manager to help ensure that all our participants have an opportunity to ask questions. This morning, Please 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.
Thank you if you'd like to ask a question. Please press star one one if your question has been answered and you'd like to remove yourself from the queue. Please press star one again.
One moment, while we hold the Q&A roster.
Our first question comes from many Grumman with Scotiabank. Your line is open.
Hi, good morning.
<unk> you concluded your remarks by talking about.
Expecting the operating environment to remain challenging in 'twenty, three and I was hoping you could go into more detail when I look at it I see some improvement in equity markets to start the year the reopening in Asia. So when I look at it it seems like there's more reason to be optimistic.
For the outlook and so I'm wondering if you could just go into where the causes for concern as you see them in 2023.
Thanks for your question Manny I think everybody I think we are seeing some signs of improvement, but I don't think we're ready to declare victory yet in terms of the overall operating environment, we do sort of see some.
Some some some.
And then potential for things to move back and forth over time.
But more importantly, I think for US we are very pleased with the diversified set of our businesses and our leadership positions within those businesses and we feel that as we've shown over the last couple of years that we can manage through pretty well through a different very different types of environments.
It's Kevin strain.
The equity markets year over year, starting off still down although they are up a little bit at the start of the year and that puts pressure on fee income, which impacts MFS impacts ESMO Gi impacts, our GRS and pensions business in Asia, but also a lot of our universal life business in Asia is tied to fee income as well so it's a bit of a headwind, but we are.
The start of the year look good I sort of address that.
My comments as well, we will see how the year performs but it's really a factor on the fee income from our equity businesses.
Thanks for that Kevin and if I could just follow up you gave an interview about a month ago talking about M&A opportunities in Asia and the potential opportunities.
Created by the reopening that may be some deal competitors potentially would be distracted. So I'm wondering if you could provide a little bit more.
Color on on those of US in terms of how you see opportunities for M&A and in Asia in 'twenty three.
And maybe more specifically what specific areas are you looking at in Asia for deploying capital.
In 'twenty three.
Yes, Thanks, Benny while post the interview we did the bancassurance deal in Hong Kong and we're quite excited about that that really rounds out our capabilities in Hong Kong. It gives us bancassurance alongside of our agency distribution, we have brokerage there and we have the second largest pension business bye bye flows so.
We're quite happy with where we ended in Hong Kong with that Hong Kong.
Bancassurance deal as you know we've done a bank assurance deal a fairly sizeable one in Vietnam that I talked about with ACB Bank in my remarks, and that built on our tradition with BP, We we redid our.
We lengthened our agreement with <unk> bank in the Philippines. So we were quite active.
In Asia and have been quite active I'm pretty pleased with where we are now if you look at our capabilities cross across Asia ability to do a multichannel distribution.
With the addition of bank assurance in Hong Kong.
You have bancassurance in every market except for Singapore.
So we're well we're well suited in Asia, I think that that piece of the puzzle of adding bank assurance in Hong Kong was an important step for us you're right to note that in aggregate you want to talk about this a little bit more of that the border is opening and we see that as a good thing for Hong Kong, the Hong Kong economy, which should be a good thing for sales in the Hong Kong business.
It will take a little while it just opened in January and those sales take a little while to to come through and there is still working through.
They're getting the momentum and sort of that travel back and forth across the border I don't know Andrew if you wanted to add anything.
Thank you you have captured it well, Kevin just a destiny in Indonesia.
Pending.
In bancassurance deal with ambient Yoghurt is very important for us.
Definitely optimistic about the potential as well as the underlying momentum that we're seeing in the insurance sales, which were almost 30% in all of our other markets, except Hong Kong and China.
I'll play, but clearly with some of the headwinds Kevin described.
Okay.
Thank you. Our next question comes from Scott Chan with Canaccord Genuity. Your line is open.
Hi.
So quiet second quarter contribution in.
I remember when you announced the acquisition you talked about.
And then kind of cited.
14% revenue CAGR from 2018 to what was probably near 2021.
The $2 7 billion, if I look in the supplemental on your gross premiums on dental it seems to be tracking in line with 2021 in terms of sales growth am I reading that right or is it more stable growth that you witnessed within that platform in 2022.
Yeah.
Well. Thanks for the question this is Dan Fishbein.
Yes.
One thing to point out is that we are reporting commercial dental which includes the legacy Sun life commercial business and then to quest in that segment.
So it's important to look at both pieces. So first of all commenting on the commercial we've actually had really great sales growth in the past year on commercial dental that was up about 50%.
It's obviously still very early we've only reported on seven months of them to quest results, but their sales results have continued to be quite strong they added $3 million in government programs members last year for example.
We mentioned Kevin mentioned in his opening remarks, some significant sales in the fourth quarter.
And that momentum has actually continued in January but to specifically answer your question overall, both their sales and revenue growth.
Have been roughly in line with the with the past trend.
It is the sales in the government programs business tends to be quite lumpy you get big sales infrequently. So a seven month period is a little bit hard to establish a trend on but so far so good.
And then when I look forward and looking at growth outside of the revenue synergies how do we kind of maybe track that is it more of like the industry trend on my government program growth or is it more on them to class, maybe taken market share and expanding into certain states like you did in Florida This quarter last year.
Yes.
I would suggest you look at our growth specifically, but there's lots of good tailwind going on there.
A very robust pipeline that tend to quest is working on right now I think it's we view it as just about the strongest that they've ever had.
There are states continuing to move their programs.
Regular fee for service to managed care and were certainly participating in all of those rfps.
There are health plans as we noted in the fourth quarter, who continue to outsource their dental business in the Medicaid and Medicare programs to us and we also have quite a bit of momentum on the commercial side. So.
We're optimistic about the growth trajectory here the pipeline is very strong.
Okay. Thank you.
Yeah.
Thank you. Our next question comes from Gabriel Duchesne with National Bank Financial Your line is open.
Hey, good morning, I've got a couple of question first here.
The group results have been both in Canada, and the U S really strong and I'm wondering if that's a.
The claims costs have been inflated at all because of interest rates.
Yes. My question is despite the impact of interest rates are still generating these strong results or is that not been a material thing.
Okay.
Wed, let Dan maybe start and John May want to jump in on the Canadian experience.
Yes.
Sure.
The group results are strong I think as you noted.
Improving morbidity and mortality of course are the primary reasons for that and kind of overwhelm all other factors.
In the U S. Our mortality moderated significantly still elevated but moderated significantly throughout the year, and especially and certainly in the fourth quarter did.
Disability morbidity.
Has improved and stabilized.
Youre right there is a little bit of an impact.
Around interest rates on long term disability liabilities, but it's relatively small.
Small compared to the.
Morbidity and mortality incidents.
Got it.
Sure.
Yes, let me answer.
In the case can you hear me in the case of Canada.
And then you would know that there's essentially three things we're looking at here.
A few years ago, we started repricing the business in line with the.
Higher volume of claims that we were seeing in the visibility group side.
That's obviously now contributing nicely to our results.
The other two things that we watch very closely our the volume of claims.
Just last quarter I would say.
Those were a little bit better than we are expecting but not materially and.
And the other area is the duration of the claims.
And there we have better experience than I expected.
On that one got retail it would be a bit careful because as we've said in the past one of the drivers.
Experience and duration is access to care.
And it's not clear in my mind that this has changed materially in Canada, we still see some challenges in the health care system. So.
So we had a great quarter, we're pleased with that of course, but as you can imagine.
So this is an area that we've always continued to watch very closely and we will do that one of the levers we look at very carefully is the pricing.
We think we're pricing in the right place.
Well I'll save the pricing discussion for the AR conference in March.
My second question is sure.
My next question is.
As on the real estate experience losses.
I get why it's happening.
Just wondering.
Or what.
Sectors, what geographies you may have.
Yielded that result.
And two could we be in another phase like the one we saw most of the 2020 where real estate.
<unk> losses were we had them for like three or four quarters in a row.
Hi, Gabriel its Randy Brown. Thank you for the question so.
Let's take a step back for a moment on on commercial real estate.
We've seen very strong growth in this sector over the last couple of years broadly.
Although you did see within that weakness in office and retail.
Retail because of the whole shift and office because.
It was exacerbated by the pandemic with that said the total return of our portfolio in Q4 was positive so what youre seeing coming through is the deviation relative to the long term.
Expectations of what we would earn right and if so.
In that though.
Very set.
Sectors broadly performed in line, so we werent seeing a major deviation between the various sub sectors.
So that would be one one point the second point would be as you think about real estate as we go forward, Yes, we do expect.
Some cap rate decompression given this speed.
Risk free rates increasing.
And we're seeing that now in some sectors, it's been offset by fairly robust rental inflation think industrial multifamily in others weakness in rent growth and cut think office.
With that said we had talked about.
Pretty major repositioning of our real estate portfolio over the last number of years anticipating.
Downturn and so to give you an example.
Office portfolio went from 39%.
24% over the last from basically the beginning of 2019 to the end of 'twenty two the majority of that coming early in that transition to the same time, our industrial portfolio more than doubled so we are positioned well within the real estate portfolio for what we believe may be coming.
And just.
You appraise a quarter of the portfolio at quarter.
You don't do it all in one shot right.
Right, it's a rolling appraisal.
So everything everything get externally appraised.
Periodically and then we will reappraise using those benchmarks will use internal appraisals on everything every quarter.
Alright, thank you.
Okay.
Thank you. Our next question comes from Doug Young with Desjardin. Your line is open.
Good morning, maybe this is for Dan Dented Quest I mean, if I look at the dental operation and I know, it's got the legacy business in there, but there was a loss of 22 million. If we back out the acquisition related costs in the U S, which I assume is all related to that the quest.
I can triangulate back that $33 million of earnings.
And I know theres going to be a little bit and therefore.
Again, the legacy business.
Curious is the math correct.
And then I've got a follow up on the U S.
Yeah, Doug I think that that is a good way of looking at it I think youre thinking about that the right way the integration expense Youre seeing there is virtually all related to <unk>.
And I can share in the quarter that the legacy commercial Sun life business Jenny.
<unk> generated about $3 million.
After tax underlying earnings so the balance would be from that the quest.
Okay, perfect and then.
Just looking at the U S group business as a whole wall.
You've expressed a margin target of around 7%.
For the quarter I know last 12 months was eight 4% booked for the quarter was 10, 4%.
I guess my question Dan.
What causes the margin to migrate down to 7%.
Or is there a need to push the 7% target higher and you see more comfort in the outlook.
For that group business over the coming years.
Yes.
Great question of course, we've just.
Went back over the 7% threshold on a trailing 12 month basis.
Cost of the primarily because of the very adverse COVID-19 mortality experience earlier in 2022.
So we've we've just gotten above that metric again, we're obviously pleased to be there.
And we don't anticipate right now a return to the Covid mortality that we saw in the fourth quarter of 2021 or the first quarter of 2022.
But having just to hit the threshold again I'm not sure we're ready yet to raise the threshold at this point.
Yeah.
And then just when I look at that business stop loss sales were down it seems from the prepared remarks, youre seeing a net pick up in competition I mean, we've seen this trend happen in the past and in margin is being negatively impacted in stop loss and I think thats, where youre punching above your weight in the margin side.
Are you comfortable that the competition isn't getting irrational and that stop loss business anything to be concerned there.
Yes, I think historically and we've said this before our stop loss has always been a cyclical business.
Margins improved competitors decide they want to take some share they get a little less disciplined a little more aggressive we've had a history of being a very disciplined underwriter in price or of the business.
And you see that in our experience we.
We actually anticipated this.
Our sales were down a bit in the fourth quarter versus the prior year quarter, but we actually plan for that now a little bit of that is we had a big block of business that came in in the fourth quarter.
2021, and we knew that that would not.
Recur so we actually our sales for the year were a little bit above our expectations, which is good but we will not bring.
Break our discipline around our view of trend and pricing.
In order to acquire market share there are some competitors, who are probably doing that right now so the market is getting a little bit more competitive.
But we think as you've noted we can continue to outperform the market on that basis.
Doug It's Kevin strain.
We're also finding new ways to to compete for business by adding things like pinnacle care on top of the stop loss business, which helps to take the conversation away from being solely price to being ways of of adding value and because we're one of the larger players we have unique capabilities to do that sort of thing.
I appreciate it thank you.
Thank you. Our next question comes from Tom Mackinnon with BMO. Your line is open.
Yes. Thanks, Good morning, a question with respect to Asia.
If I look at the impact of new business. It was positive one in the quarter now we've seen that a similar positive one in the fourth quarter of 2021.
Historically this has always been.
Negative.
Sales were up nicely international or they were flat year over year in the international hubs.
At about 10 or 11% in the local markets.
Just curious as to what's driving this.
In this quarter is it.
Is it more profitable new business is it a better mix how sustainable would that be granted there is going to be an accounting change as to how this stuff is going to be booked.
So any color there and then I have a follow up thanks.
Thanks, very much I think Johnson here exactly right. This quarter, we are very pleased with the new business gains, particularly in Vietnam and international where it has been a focus to improve product economics and margins relating today. So that would be very pleased about and then you are seeing.
Just some changes if we look versus the prior year and just the absence of some of the benefits that we would have had in prior years, we had reversed of mortality and some investment related gains.
I think on new business strain specifically there is a combination of things Ingrid the approach to selective underwriting for the international high net worth has made that business more profitable and then as we've added scale that also helps in terms of business trained so adding the bank assurance agreements end.
Focusing on building out agency helps with the new business strain item that you were talking about and Tom as you noted of course that goes away in reference 17, but were happy to see a positive result from the selective underwriting and the addition of scale.
Okay. That's great and then the follow up here is just curious as to what's driving the increase in the light cat upon transition.
If I look back off the headset the movement accounting doesn't this accounting change is not going to drive capital I think they had said for the industry as a whole.
The movement to <unk> 17 would be capital neutral so just.
Just curious as to.
If you can put your.
Now high single digit I think it has impact upon transition.
To your light cat ratio in that context is there what is driving your increase in.
And any commentary you can share with.
What I said about the industry.
It would be helpful as well thanks.
Sure. Thanks for that question, Tom It's Kevin Morrissey.
So yes, we are expecting a favorable high single digit light cat ratio increase.
At January one of 2023 is part of the transition to <unk>, you're right to point out that asks you did set a target for industry neutrality, recognizing that there will be pluses and minuses. Some companies will be more favorable some less so that was an overall.
What's driving our specific increase I think there's a lot of moving pieces Tom.
As you know light cat ratio is quite complex and is moving pieces.
Across the numerator and the denominator, but I think that we can highlight probably the one driving factor that accounts for sunlight increases the change to the scalar so oxy scaler on debased solvency buffer reduces from 1.05 to one and this accounts for approximately seven point increase that transition for <unk>.
Sun life.
Maybe.
One final thought I'll leave with your question with regard to color on the industry I think that one of the challenges around the final calibration Asti had as to changing market conditions and the volatility of light cat under <unk> 17, as it responds to changes in market conditions, especially interest rates.
And so I think that with that kind of moving ball throughout the year of 2022, it's quite difficult to set that exact point and I think that where we landed with interest rates higher that was probably a bit overall favorable for the industry.
Okay. Thanks for that color and your $1 billion I think it's your capital generation annually after investing in the business and paying your dividend is still.
Yes, Tom it's Kevin again, yes, that's right we're seeing the <unk> 17 outlook largely the same in terms of capital generation.
Okay. Thanks for that.
Thank you. Our next question comes from Paul Holden with CIBC. Your line is open.
Thank you I wanted to continue with the with the same topics. It's an important one given the.
And you like that ratio.
And sort of in the context of what you were just saying regarding increased volatility.
<unk> does all of the additional.
Capital margin becomes deployable capital or will you have a bias to maintaining more of a.
My cat margin because of that increased volatility under Ias 17.
Thanks for the question, Paul It's Kevin Morrissey I'll answer the first part around the volatility and then I'll pass it to manage it around the deploy ability of that.
So when we're thinking about the light cat volatility.
The comments I made around volatility is largely with regard to interest rates and I did mentioned the changing interest rate environment volatility of interest rates that we saw throughout 2022.
Where we are now with interest rates, we see are our interest sensitivity for <unk> to be largely in line with our reported sensitivities now however, one of the things to note that as the sensitivities can change quite a bit with changing market conditions. So for example, with interest rates being.
<unk> or higher those sensitivities will change more rapidly than they do under <unk> four.
And a lot of that is driven by the.
<unk> 17 market consistent cost of guarantees.
In the new accounting, an actuarial basis so.
That is something that we're aware of that we're going to be a monitoring and we're ready to manage but it is something we do expect will create some.
Inherent increase in underlying volatile.
And then just on the second question policy management.
Overall, the higher capital will lead to higher Holdco cash in deployable capital, but I would just sort of note two considerations. The first is that some of the Leichhardt increase that we're getting is related to businesses outside of Canada and for those businesses. There continue to be subject to their local regulatory requirements. So there can be some timing differences between.
When that when we when we can bring that cash bounce back up to Sun life and the second factor to consider is obviously as we've talked about in Kevin's remarks in mind. We also look at the overall operating environment and kind of base, our capital levels and up in that environment and so those will be two additional considerations.
Alright, thanks for that.
And then second question is with respect to SLC.
See another year of strong sales.
There has been some.
Industry news regarding certain certain alternative managers.
Closing funds for redemptions, maybe some sales headwinds because of higher rates and concerns regarding valuation and the private asset classes. So I think it would be helpful. Just given an update on.
Currently.
And expecting for SLC.
Flows in 2023.
Thank you.
Thanks, Paul It's Steve Peacher I'll comment on that just quickly looking back at 2022, obviously, a volatile market environment, but we feel really good about the capital that we are able to raise in the past year I think total capital raised was was $18 billion for the year.
AUM, depending on whether you look at fee, earning AUM are totally AUM was up double digits net flows were over $20 billion for the year. So when I look back at 2022 despite.
A challenging environment for institutional investors.
It's a good capital raising environment for us.
Certainly see some pressures in the institutional market looking forward, because if you're making decisions.
Large pension fund insurance company volatility of the markets makes decision making harder.
The other thing is that we have something called the denominator effect and so as public markets have traded off more dramatically than private markets.
<unk> weighting in our portfolio to private markets increases and so when our chief investment Officer is think about allocating their next dollar and they see their alternative weightings are higher there may be a little bit less prone to allocate there.
So that created some headwinds in the fourth quarter you saw that our fundraising was positive in the fourth quarter, but lower than it had been earlier in the year I think that pressure is going to kind of continue.
A bit.
Continuing in the first half of this year, having said that it's against the backdrop, both institutionally and now on the retail front of the trend toward alternative asset classes. So youll have some fluctuation in trends as the economy moves its interest rates.
Rates move, but the basic.
Trend is toward higher allocations.
We don't see that stopping and we think it's a multiyear trend.
Great. Thank you.
Thank you. Our next question comes from Nigel D'souza with Veritas. Your line is open.
Thank you good morning, I wanted to go back to SLC management and.
When I look at the revenue line item.
Materially quarter over quarter, it looks like Thats related to Crescent carried interest.
There is a corresponding increase in expenses just wondering was there anything that particularly drove a bit more lumpiness this quarter.
That item because there are some bigger divergence between toll revenue.
Fee related revenue and how we should think about that going forward.
Thanks for the question Nigel the way I would I really think.
Given our disclosures now, which I think we improved last year and expand it really if you want to look at the core of trends in the business. I think you should look at management fees you can I know in the supplement its revenues are on page 87, I think in the supplement and management. If you just isolate management fee revenue for the quarter. It was $234 million up from <unk>.
$204 million last year and for the full year was 862 million up from $7 55 for about a 14% increase and those are core management fees for managing assets under management and those revenues up because because AUM is up.
If you look at and then the core earnings measure.
That we look at it and also you look at across the industry as fee related earnings and fee related earnings for the quarter were $73 million that was up 22% from the fourth quarter of last year and for the full year.
Fee related earnings were up 20%. So that's really I think the way to look at the core business in terms of performance fees.
We don't have a lot of performance fees, yet coming through those actually I think are recorded below.
Underlying income and reported net income over the coming years, you will start to see I think more performance fees impact results.
Okay. That's helpful and then if I could switch to.
Seven I believe.
And you had mentioned that the <unk>.
Fax was on investment activity gains.
Running lower and.
The benefit of the spreads being recognized over a longer period of time, just wondering if you could expand on that.
Whats the spread benefit.
Recognize over the duration of that underlying asset and could you size. The expected decrease in the run rate of investment I think would it be 2030, 40% lower NII for 2017.
So Nigel let's manage it so yes, so under our first four when we when we trade up in our investment portfolio of that excess spread as you know is present valued into our earnings under our first before you get the same excess spread so economically and from an earnings standpoint over time that the benefits will be the same but that spread now instead of being present.
<unk> <unk> to earnings in the quarter that you undertake the activity will come in over time over the duration of the assets. So that would be really a function of the duration of the assets that we traded up in June .
Okay. So no.
Sizing there, but just to circle up on guidance you had earlier I think you mentioned previously.
Underlying net income for 2017, and 2023 to be higher than underlying income of virus.
For 2020 is that still the guidance that you expect for this year.
Well I think what you have to do Nigel is that we just updated our impact from going from <unk> to <unk> to be high single digits and then if you wanted to take a look at what happens in 2023, then you have to factor in the current operating environment that we're in and take a take account of how that would impact of all of our businesses and I will say as we said in may that two thirds of.
Our businesses are not impacted by FY 2017, so a business like MFS and SLC. Our group businesses you could kind of just look at what you would normally expect to come out of those businesses in this kind of environment.
Okay I'll leave it there thank you.
Thank you we have no further questions at this time I will turn things over to Mr strain for closing remarks.
Well. Thank you operator, and thank you everyone for the great questions before we close today's call I would like to take a moment to thank our employees for their dedication resilience and persistence over the course of the year the strength of our people and culture combined with our focus on execution has been instrumental in achieving great progress on our strategy in 2022.
A big Thank you from me and the executive team to all of our people.
Thanks, operator, Thank you Kevin. This concludes today's call a replay of the call will be available on the Investor Relations section of our website.
And have a good day.
The conference will begin shortly to raise and lower Johan during Q&A, you can dial star one one.
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