Q1 2023 Sun Life Financial Inc Earnings Call
Speaker 2: Good morning and welcome to the Sunlight Financial Q1 2023 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 host of the call is Janice Bitton, Vice President Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton. Thank you.
Speaker 3: Thank you operator and good morning everyone. Welcome to Sun Life's earnings call for the first quarter of 2023.
Speaker 3: Our earnings release and the slides for today's call are available on the investor relations section of our website at Sunlife.com.
Speaker 3: We will begin today's call with opening remarks from Kevin Strain, President and Chief Executive Officer.
Speaker 3: Following Kevin, Manjit Singh, 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.
Speaker 3: Other members of management are also available to answer your questions this morning.
Speaker 3: Turning to slide two, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. And with that, I'll now turn things over to Kevin.
Speaker 3: Thanks, Yuneve, and good morning to everybody on the call. Turning to slide 4, we started 2023 with strong results driven by our execution capabilities and growth across both our health and protection businesses, highlighting the resilience of our business mix and the importance that our clients continue to place on health and financial security.
Speaker 3: This is Sun Life's first quarter reporting under IFRS 17 and IFRS 9. A special thank you to all the Sun Life employees involved in these efforts. With the adoption of these standards, while the adoption of these standards will impact how and when some of our business results are reported, it does not change our strong fundamentals, capital strength, or client impact strategy.
Speaker 3: While global markets remain challenging for our asset management businesses, we continue to see strong fundamentals and performance from MFS and SLC management. MFS AUM has increased since the end of last year and net flows have improved year over year. SLC management pre-related earnings were up over 20% year over year on higher fee earnings AUM.
Speaker 3: reflecting strong capital raising and deployment across the platform.
Speaker 3: SLC management also completed the acquisition of a 51% interest in advisors asset management and are commencing the development of alternative products to meet the demand of high net worth individuals. Sun Life US had a strong first quarter underlying earnings reflecting strong premium growth contributions from DentroQuest.
Speaker 3: and meaningful improvement in mortality and disability experience. DentalQuest had strong business growth during the quarter, with significant Medicaid and commercial business wins. These contract awards, along with other dental sales in the quarter, will allow us to improve preventative care and oral health outcomes for an additional 650,000 members.
Speaker 3: as they are onboarded over the next year. Sunlight Canada also achieved strong earnings during the quarter, driven by growth across all business lines. We close the sale of our sponsored markets business, releasing capital and enabling greater focus on growing the core segments within our group benefits business. We'll continue to extend our focus to help our clients access healthcare and wellness solutions.
Speaker 3: We maintain great momentum in Sun Life Asia, achieving 24% overall sales growth and over 20% insurance sales growth in five of our markets, including our four largest markets, the Philippines, Hong Kong, India and international. Notably, Hong Kong sales were up significantly as a result of tailwinds from the reopening of the border with mainland China.
Speaker 3: paired with uplifts from new product offerings.
Speaker 3: Our Philippines business achieved the number one market position for new business premiums and total premiums again in 2022. This is our 12th consecutive year leading the market in total premiums.
Speaker 3: We also announced a 15-year exclusive bank insurance partnership in Hong Kong with Dossing Bank, where Sun Life will be the exclusive provider of life insurance solutions to Dossing Bank's approximately 570,000 retail banking customers. We remain excited about the opportunity to further our growth in Asia as markets are open following pandemic restrictions.
Speaker 3: was up 50% year over year, driven by the impact of new insurance business in Canada and Asia. Total CSM reached $11.2 billion at the end of the quarter.
Speaker 3: Underlying ROE for the quarter was 17.3% and continues to trend towards our medium-term objective of 18% plus, reflecting our disciplined capital management and sustained emphasis on capital light businesses. We also ended the quarter with a very strong capital position with a LIHCCAT ratio of 148% at SLF.
Speaker 3: We announced a three cent increase to our quarterly common share dividend, demonstrating our commitment to continue deploying capital to shareholders. Turn to slide five. This quarter we delivered on several key business initiatives that drove our client impact strategy.
Speaker 3: Helping clients access health care and coverage they need remains a top priority. In the U.S., we are seeing impactful results from our Ableto partnership, which provides access to virtual behavioral health therapy and coaching for our members with cancer. We began offering this program in Q2 2022.
Speaker 3: and are already making a difference for participating members, where early results show a greater than 50% reduction in their anxiety, depression and stress levels. This is important as there is a strong correlation between mental health and physical recovery.
Speaker 3: We continue to increase access to similar services in the first quarter, expanding our partnership, again with Ableto, to offer self-care, an on-demand wellness program to support mental health for our life insurance members and partnering with Goodpath to provide digital personalized care and coaching to improve outcomes for members with certain disability diagnoses.
Speaker 3: These services help differentiate our offering in the U.S. while broadening access to programs that help people live healthier.
Speaker 3: Furthermore, Sunlight's Health Navigator, powered by PinnacleCare, is providing personal care navigation services to help members access timely and quality care as well as expert medical opinions which benefits members with diagnosis and treatment plans. Recently our services helped a member's 8-year-old daughter with a severe eye injury.
Speaker 3: who had been recommended a surgical procedure with a low success rate. A personal health advisor connected the member to an ocular trauma specialist who recommended they not do the surgery. As a result, the child's eye is healing, giving her mother comfort in making medical decisions and our
Speaker 3: We continue to leverage our digital capabilities and product innovation to help clients achieve lifetime financial security. We recognize the importance of having a comprehensive financial plan that focuses on wealth, insurance and protection services. We're committed to providing our clients with the tools and advice they need to build financial confidence and navigate through important life stages.
Speaker 3: In Canada, we enhanced the Sun Life One Plan digital tool, enabling clients to update their financial roadmaps directly, while collaborating with their advisors on personalized goals. We introduced this tool to retail clients in 2022 and in 2023 and extended that to over 750,000 Canadian GRS clients this year. Nearly 100,000 financial roadmaps have been created to date for retail clients and for the entire industry.
Speaker 3: We're also embracing our responsibility to create a more sustainable and brighter future. Sun Life has made a commitment to being sustainability driven. It's critical to our purpose that we are focused on increasing financial security, fostering healthier lives, and advancing sustainable investing in areas we know best.
Speaker 3: One key area of focus is climate change and Sun Life is committed to being part of the climate solution. We set a goal to achieve net zero greenhouse gas emissions in our operations and investments by 2050 and have established several interim targets for our general account and asset management businesses. To achieve our goal and contribute to the wider global movement to net zero, we have to make sure that our
Speaker 3: We continue to collaborate with advocate programs and policies that can help drive the transition to a low carbon economy.
Speaker 3: Furthermore, SLC management continues to invest in assets that generate a stable and attractive yield and that generate a positive environmental impact.
Speaker 3: For example, this quarter, SLC management invested in the construction of two new vessel builds that will support the long-term operation and maintenance of two offshore wind farms in the UK, which supply power to 2 million households each year. These vessels will support environmental clean operations and the use of alternative fuels. Depending on the theme of sustainability and our commitment to diversity, equity, and inclusion,
Speaker 3: Sun Life was named among the companies in the Global Males 2023 Report on Business Women Lead Here list.
Speaker 3: This is the fourth year in a row Sun Life was recognized for its commitment to achieving gender parity at VP plus roles and helping women thrive in corporate Canada. We're also pleased that Sun Life was recognized among America's best employers for diversity by Forbes magazine in the US and and congratulations to Laura Money our chief information and technology officer.
Speaker 3: for being recognized as one of the top CIOs in North America by business chief. Laurier has been instrumental in driving our digital transformation and innovation efforts.
Speaker 3: Finally, trust is at the heart of our business and around the world we continue to be recognized for our trusted brand. This quarter, Sunlight Philippines received the Platinum Award in the Life Insurance category in the Trusted Brand Awards for the 13th consecutive year, demonstrating our ability to make a difference in our clients' lives and helping us sustain our market leadership position.
Speaker 3: While the external environment remains challenging and uncertain, we are confident that our diversified and capital-like business mix, strong capital position, and prudent approach to risk management will allow us to manage through market volatility and, more importantly, continue to help our clients achieve life-sustaining security and live a healthier life.
Speaker 3: And with that, I will turn the call over to Manjit, who will walk us through the first quarter financial results. Thank you, Kevin, and good morning, everyone. I'd like to begin by thanking all the teams across Sun Life who worked tirelessly to ensure a smooth transition to the new IFRS 17 and IFRS 9 reporting standards. This was a significant multi-year undertaking for Sun Life and the industry.
Speaker 3: culminating with the release of our first quarter results today. The impacts of transition to IFRS 17 are generally in line with what we had previously communicated. The impact of SLF LiCa was an increase of 12 points.
Speaker 3: Slightly better than the high single-digit estimate we provide in February , as we continue to refine our estimates with the finalization of our dual reporting period.
Speaker 3: We are also reaffirming our medium-term financial objectives, including underlying ROE of 18% plus, up from 16% plus.
Speaker 3: underlying EPS growth of 8 to 10 percent, and underlying dividend payout ratio of 40 to 50 percent. Now let's turn to slide seven, which provides an overview of our first quarter results.
Speaker 3: Sun Life had a strong start to the year, with a good underlying earnings growth, an underlying ROE of 17.3% and a strong capital position.
Speaker 3: Underlying net income of $895 million and underlying earnings per share of $1.52 were up 24% from the prior year, reflecting the strength of our business fundamentals and the benefits of our diversified mix.
Speaker 3: Sun Life provides three main types of services to our clients. Wealth and Asset Management, Group and Health Protection, and Individual Protection.
Speaker 3: Wealth and asset management businesses comprise approximately 40 to 45% of our earnings. These businesses generate fee-based earnings and spread income on investment products.
Speaker 3: Drivers of underlying results include net client flows, impact of markets and asset values, spreads over crediting rates on guaranteed products and operating margin.
Speaker 3: Wealth and asset management results were resilient this quarter.
Speaker 3: While asset management earnings were impacted by globally equity market declines over the past year, there was this mostly offset by higher wealth management earnings.
Speaker 3: Higher wealth management investment income was driven by volume growth and increase in asset yields.
Speaker 3: Group and health protection businesses comprise approximately 30% of our earnings and include Sun Life's leading positions in Canada and U.S. stop-loss, employee benefits and dental. These businesses generate earnings from shorter-term insurance coverage and fee-based services.
Speaker 3: The key drivers include premium growth driven by active members and protection coverage provided, actual experience relative to expectations, and service-related fees. In Q1, group underlying earnings benefited from premium growth, favorable experience, and higher fee income including the contribution of DentiQuest.
Speaker 3: And third, individual protection represents 25 to 30 percent of our earnings and comprises our longer term protection businesses.
Speaker 3: Profitability reflects new sales which drives premium growth, retention of enforced business, earnings from investing premiums, and insurance experience.
Speaker 3: Individual protection and underlying earnings were up year over year, driven by premium growth, reflecting good sales momentum as well as improved mortality experience in Asia. We generated new business CSM of $257 million and higher sales in Canada and Asia, as well as favourable sales mix in Hong Kong, the Philippines and high net worth.
Speaker 3: Earnings and surplus were higher across our businesses, reflecting higher realized investment gains and growth in net interest income from higher yields on invested assets.
Speaker 3: Reported net income for the quarter was $806 million, up 21% from the prior year. The results for this quarter include a gain in the sale of our Canadian sponsored markets business, partially offset by market-related impacts, the acquisition-related costs for DentiQuest and AAM, and amortization of acquired intangibles.
Speaker 3: Market impacts in the quarter are mostly driven by flat total real estate returns, which is lower than our longer term experience of approximately 2% per quarter.
Speaker 3: Our balance sheet and capital positions remain very strong, a key strength in this environment.
Speaker 3: SLF LI-CAT of 148% was up 18 points from the prior quarter, including 12 points from the transition to IFRS 17 and 6 points of organic capital generation in the first quarter, primarily from capital optimization. Our strong LI-CAT and low financial leverage ratio of 23.2% provides support for continued investment in growing our businesses and future capital deployment.
Speaker 3: Now let's turn to our business group performance starting on slide 9 with MFS.
Speaker 3: MFS underlying net income of US $188 million was down 15% from the prior year, driven by lower average net assets largely reflecting declines in global equity markets and net outflows.
Speaker 3: Reported net income of US $200 million was down 12%.
Speaker 3: MFS pre-tax net operating margin of 37% was down two points from the prior year reflecting lower average net asset levels.
Speaker 3: AUM of $570 billion was up 4% from Q4, our second consecutive quarter of sequential growth. Retail net outflows of US$1.8 billion and institutional net outflows of US$2.4 billion both improved from the prior quarter.
Speaker 3: MFS continues to generate to experience lower US retail redemptions compared to the industry.
Speaker 3: And another positive in the quarter was approximately $1 billion of net fixed income inflows. Turning to slide 10, SLC management generated fee-related earnings of $68 million, up 26% every year.
Speaker 3: This increase reflects strong net flows and deployment of capital into fee-earning AUM over the past year.
Speaker 3: Fee-related earnings is an important leading metric for asset managers in the alternative space. Underlying net income of $28 million was down from the prior year as fee-related earnings growth was more than offset by lower seed investment income and higher compensation expenses.
Speaker 3: reported net loss at SLC Management was $17 million, primarily driven by acquisition-related costs. Capital raising of $2.3 billion was a good result for the quarter, given challenging market conditions and lower allocations to alternatives, as relative weightings have increased due to outperformance versus other asset classes.
Speaker 4: commonly referred to as a denominator effect.
Speaker 4: Total AUM of $218 billion was up 18% year over year. This includes $21 billion that is not yet earning fees.
Speaker 4: Once invested, these assets are expected to generate annualized free revenue of more than 180 million.
Speaker 4: Turning to slide 11, Canada's underlying net income of $316 million and reported net income of $329 million were both up sharply from the prior year.
Speaker 4: Wealth and asset management underlying earnings were up $34 million supported by wider investment spreads and volume growth, which more than offset lower fee-based earnings reflecting equity market declines over the past year.
Speaker 4: Group health and protection underlying earnings increased 36 million year over year on improved disability experience in higher margins and shorter claim durations.
Speaker 4: Overall, the Goop business maintains strong momentum, delivering both premium and free growth.
Speaker 4: Individual protection was up $40 million, driven by premium growth as well as higher contribution from investment earnings.
Speaker 4: Individual protection sales were up year over year, reflecting strong demand for PAR products.
Speaker 4: Earnings and surplus in Canada was up from the prior year and drove increases across all business types, reflecting higher investment income and realized investment gains.
Speaker 4: Turn to slide 12, US underlying net income was US $176 million, up $93 million from last year.
Speaker 4: Reporting net income of the U.S. 125 million was up 81 million year-over-year.
Speaker 4: Group health and protection underlying earnings were up $103 million, driven by good premium growth across all businesses.
Speaker 4: contribution from the DentiQuest acquisition, and favorable experience.
Speaker 4: First quarter results were driven by strong underwriting performance in our stop loss business and a significant moderation of pandemic-related mortality and disability experience in the group benefits business.
Speaker 4: Sales in the U.S. are driven by strong momentum in dental and higher margin products and employed benefits.
Speaker 4: Individual protection in the US continues to generate good earnings and investment returns. First quarter results, however, were impacted by higher claim amounts.
Speaker 4: We're pleased with the Dentiquest results this quarter. We are winning new business, are on track with our integration milestones, and are confident that we will achieve our synergy targets.
Speaker 4: Slide 13 outlines Asia's results for the quarter. Underlying that income of $141 million was up 4% year-over-year on a constant currency basis.
Speaker 4: Reported net income of $134 million was up 14%, including favourable market-related impacts.
Speaker 4: Wealth and asset management underlying earnings were down 29%, reflecting lower fee-based earnings from equity market declines.
Speaker 4: Individual protection earnings, which comprise 85 to 90% of Asia's earnings, were up 7% in constant currency compared to the prior year.
Speaker 4: This was driven by higher premiums from good sales momentum and improved mortality experience in high net worth.
Speaker 4: Individual protection sales were up 25%, primarily driven by higher activity in Hong Kong, with the lifting of border restrictions and continued momentum in the high net worth business.
Speaker 4: Overall, we're off to a good start for 2023 amidst a challenging operating environment. This quarter continued to demonstrate the strength of Sunlight's business model, including strong fundamentals and leadership positions in diverse, global businesses.
Speaker 4: good sales momentum reflecting our focus on client needs, as well as diligent pricing and risk management. Excellent balance sheet and capital positions and strong execution against our key business priorities to drive future growth.
Speaker 3: With that, I'll turn the call back to you for our Q&A portion. Thank you, Manjit. 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 question.
Speaker 2: I will now ask the operator to poll the participants. Thank you. If you would like to ask a question, please press star 1 1. If your question has not answered and you would like to remove yourself from the queue, please press star 1 1 again.
Speaker 2: Thank you. And our first question comes from Minnie Grauman of Scotiabank. Your line is
Speaker 4: Hi, good morning. You referenced in Q2 pro forma cash at the Holdco level of $2 billion. And I'm just wondering if you look out beyond, does that number move up materially? Is there more cash at the opcode to move up to the Holdco?
Speaker 4: the next half of the year. Morning many. It's managed. Um yes, as you mentioned, and we were expecting to have a nice increase from Q1 work local cash was 1.1 billion up to two billion at the end of the second quarter. And given our strong like high capital position, both of the whole call and the up call. We expect that whole call cash to continue to increase in the
Speaker 5: The follow-up question is just in terms of capital deployment priorities. You have been busy over the last little while and just wondering with that cash amount what the priorities are as it changed since you talked to us about it last time. So just wondering how you see that.
Speaker 3: that cash being deployed over the next number of quarters? Hi, Manny, it's Kevin. You know, the priority for our capital deployment is unchanged with the change to IFRS 17. We do have a strong position. We continue to have our dividend and organic growth being the number one priority.
Speaker 3: We do have, we are active in the M&A and you've seen that in the last few years. We always look for chances to build capabilities or to build scale as long as it meets our financial targets. And then we do consider buybacks based on what's in our M&A pipeline and what we see from a...
Speaker 3: growth perspective, use for organic capital and those types of things. So we have all four tools in front of us and we prioritizing these in the same way we have in the past.
Speaker 5: Thanks for that Kevin.
Speaker 2: Thank you. Our next question comes from Gabriel Deshaene with National Bank. Your line is open. Your line is open.
Speaker 6: Hey, good morning. A couple quick questions here. One, you made reference to capital optimization. I think that added four points to like that. Can you delve into that a bit more? and then
Speaker 6: Question for I guess Pentel Green Oak. All the stuff we're seeing in the commercial real estate market.
Speaker 6: So just wondering how that affects their fundraising capabilities or fee stream today even. If there's any general comments about the marketplace that you could share, that would be great too. Good morning, Gabe. I'll take the first question. I think Randy will take the second one.
Speaker 4: So out of the six points that I referenced of internal capital generation in the quarter, about four of those, four of that was from capital optimization and those would generally include things where we're obviously reducing and managing the risk profile of the companies. So it would be things like ILM actions where we're tightening up some of the residual risk and other reinsurance activities.
Speaker 7: Randy, you want to take the second one? Yeah, hey Gabriel, it's Steve Peacher. Let me address your question on BGO. Yeah, there's no question that there's pressure on the real estate market and as everyone knows there's concern about office cap rates are up with interest rates but also risk premiums, mortgage lending rates are up. Having said all that, you know, in the quarter BGO was net positive in terms of fundraising they...
Speaker 7: funds. A lot of the products are multi-year products where the money is locked up for that period of time. So that's very important. And we continue to see fees growing at BGO, management fees, we would expect to continue that. The other thing that they've done a great job with is launching targeted subsector products. Like they have a great cold storage product focused on that subsector of industrial.
Speaker 7: their biggest weight across their funds actually is industrial, which continues to perform very strongly. So, you know, they're reacting to this pressure and have reacted leading into this by being focused on the subsectors of real estate which are doing well. Doesn't mean they're completely immune from the pressure on an area like office, but you know, but we think they still continue to have momentum.
Speaker 7: So inflow is slowing down, not seeing any pressure on withdrawals or anything of that nature at this point? No, what we have seen, they have an open-end fund in the U.S. that's in the Odyssey index, and they have seen more redemption requests out of that fund, as has every fund in that Odyssey universe, but they continue to raise money in their fund.
Speaker 7: closed-in funds, they have an open-end fund in Canada where actually they're getting money into the fund. So, you know, you have to look across the broad platform. So, you know, they expect to raise a meaningful amount of money this year, but there's no question that the fundraising environment is more difficult than real estate.
Speaker 6: All right, well thanks for all that. Have a great weekend, everyone.
Speaker 2: Thank you. Our next question comes from Doug Young with Desjardins. Your line is open.
Speaker 8: Hi, good morning. I guess maybe this question is for Dan. Just on the U.S. group side, I
Speaker 8: two parts, the decline in dental underline earnings. I don't know if there's like it's sequentially, I don't know if there's some seasonality in there. Maybe you can weave in what the contribution from DentaQuest was and was their big swings quarter over quarter. And then, you know, the second part is just the US medical stop loss sales were down. And I know this isn't a big sales quarter, but you did call it last quarter increase competition.
Speaker 9: is one of the two quarters with the highest loss ratios. And I think you saw that in our peers as well. Fundamentally, a lot of clients, particularly government programs, enroll January 1st, people have a new benefit. They tend to go and use that. So that's certainly one of the contributing factors there. We did have a little bit of adverse experience in the Medicare business this quarter. I think some of that really is due this fall.
Speaker 9: the vast majority of this and the dental business. There's great momentum, great sales momentum. We're on or ahead of our targets for synergies. The integration is going well. So we still feel very, very good about the trajectory of that business. On stop-loss sales, you're correct. They were down a bit in the first quarter.
Speaker 9: to be performing very well, so that leads competitors sometimes to price aggressively to win new business. It's worth noting our sales are still roughly double the next biggest comparable provider of stop loss, and again it's a small quarter, but we are taking some action, both selectively to increase competitiveness.
Speaker 9: And then also with new initiatives, we have a new artificial intelligence approach that's enabling us to target cases that previously we might not have quoted on. We recently sold our first case using that AI tactic. So we have a lot of things going on to continue to enhance our competitiveness.
Speaker 8: Perfect. And then just second on commercial real estate that's on your own books. And I know you talked about.
Speaker 8: returns being relatively flat. Some would suggest perhaps, you know, there should be decent marks on this, on the books, whether it's the mortgage book or the, the investment properties. Just wondering, can you talk a bit about marks that you have taken on this book? And I guess more on the office space than not.
Speaker 8: and or allowances that you've taken on this book and what you foresee, if you can talk a little bit of the outlook, and what you could foresee coming down the pipe as it relates to marks or allowances on the book.
Speaker 3: Sure, thank you for that, Doug. It's Randy Brown. So yes, real estate seems to be the topic du jour on everyone's radar. And our portfolio, as you rightfully point out, was essentially flat on the quarter, which was
Speaker 3: something in line with our expectation at this point. In terms of our portfolio, as you think about it, we've talked in the past, we embarked on a multi-year repositioning strategy, anticipating what we're seeing now. So let me give you a couple of examples.
Speaker 3: From 2017 till now in Canada, we reduced our office weighting from 38% to 24%, retail from 25% to 11%, and increased industrial from 18% to 37%. During that time, we sold 39 office properties.
Speaker 3: while we bought seven and developed two new in Canada. In the US, the repositioning was similar. Office dropped from 55% to 28%, retail 20 to 14%, an industrial increase from 18% to 58%.
Speaker 3: And here we sold over 30 office buildings, 85 properties in all. So this was the most active CRE transaction period in the history of Sun Life.
Speaker 3: And that's led for us to earn returns above both our long-term estimates and above comparable market benchmarks. So our real estate portfolio has been repositioned, it's performing well. And in terms of outlook, we've been able to get a lot of results.
Speaker 3: We do expect further weakness, particularly in office. We've written it down approximately 20%. It's very building specific.
Speaker 3: So it's hard to generalize, but let's call it approximately 20% in the last several years. So we think we've reflected some of the market changes, but do see weakness.
Speaker 3: continuing to show in the next few quarters. Appreciate the color. Thank you very much.
Speaker 2: Thank you. Our next question comes from Thomas McKinnon with BMO Capital. Your line is open.
Speaker 9: Yeah, thanks very much. Just a couple questions here. One, if I look at this line, expense is other.
Speaker 10: You know, it's up in the US, but that's got to be overall because of DentaQuest. But in the corporate segment, it seems to jump all over the place and it's up 46% year over year. It seems to be heavily weighted to the first quarter. I wonder if there's anything unusual in that number on how we might be thinking about that number. And then I have a follow up. Thanks. So good morning, Doug. Sorry, Tom. Hello, thanks sure.
Speaker 4: going forward.
Speaker 10: Okay, that's great. Mabel asked the question about capital a little bit differently here. I mean, it's still two points of organic capital you're generating. In my calculation, it seems to be about at least $300 million, maybe even $400 million. You've got more money going up to the whole co.
Speaker 10: here and in terms of cash and you're a year through DantaQuest. It seems to be going well. I guess Kevin when you when you it's a high class problem to have but when you tell investors you know, we'll invest in our business. What is it that where do you think you need to invest in your business and how do you tell shareholders that those investments
Speaker 3: the strength of our balance sheet, some of the stuff that Randy talked about and how we change the mix and continue to leverage the balance sheet and then the mix of our businesses. And so the strong capital position doesn't happen by accident, it comes by direct strategy and working on it. If I step back and look at
Speaker 3: five acts versus the growth in the business. We have a target of medium term objective over 18% ROE. We look for strong growth in business of eight to 10% and we look to provide a dividend yield in our medium term objective 40 to 50%. So when we think about M&A, it's all about building capabilities or building scale.
Speaker 3: in line with those three medium-term objectives. And so if we can't do M&A or even organic growth that meets those medium-term objectives, then we will give it back to shareholders. But when we do M&A, we have strong conviction that we can meet those objectives. And we also have strong conviction that we can be successful in the integration.
Speaker 3: And so DentiQuest is a great example. Dan talked about the momentum on our integration there and the integration approach. And we think that's gonna deliver on our business case. And that's the second largest M&A we've ever done in the history of the company. And the first, the largest one we've ever done outside of Canada. So that just gives you an example of how we're thinking about it. So, our commitment is to deliver on those three medium-term objectives and what we...
Speaker 11: performance.
Speaker 3: So in Asia we've been building scale and you've heard us commit to a 15% growth in the earnings and that's growth in earnings faster than the growth in capital so you should see the ROE there improving over time. We're also looking for cash back from Asia and we stress that to Ingrid and the team there that... bit. Yeah.
Speaker 4: when they don't need capital, we want it back in the corporate. So they have to meet the same objectives that the rest of the company does. And the other thing I'd add on there, Tom, is that obviously as you mentioned and Kevin mentioned, we've invested a lot, so there's a lot of goodwill that's kind of in the denominator. If you look at it on a tangible basis, are always kind of approaching mid-teens.
Speaker 4: when they don't need capital we want it back in the corporate so they have to meet the same objectives that the rest of the company does. And the other thing I'd add on there Tom is that obviously as you mentioned and Kevin mentioned we've invested a lot so there's a lot of goodwill that's kind of in the denominator if you look at it on a tangible basis are always kind of approaching mid-teens. Yeah okay thank you.
Speaker 12: Do we have another question operator?
Speaker 2: Yes, Paul Holden with CIBC. Your line is open. Thank you.
Speaker 13: Thank you. Good morning. So maybe to close the loop on the topic of the day, commercial real estate, if we can talk about the commercial mortgage book on your balance sheet. I don't know what kind of drill down you can give us, but it would be helpful to get a sense of exposure to
Speaker 13: office there and I guess office specifically in US and any kind of metrics you can give us on credit allowances, how you're looking at watch list and overall ability of the borrowers to cover required mortgage payments. Thank you.
Speaker 3: Sure, Paul, Randy Brown, thank you for the question. So the mortgage book underwent a very similar exercise to what we did on the real estate equity portfolio, very much of an up in quality strategy that's been employed over the last five years.
Speaker 3: So again, let me give you some examples to demonstrate the case. So the entire book
Speaker 3: has gone up from a triple B to a single A rating over that period, which was a pretty massive undertaking. We have an average loan value of 54%, debt service coverage about 1.7%, and increase the average loan size.
Speaker 3: By about 50%. So I would call this another big up in quality trade in a portfolio to position for the, you know, what we expected to be a weakness that we're seeing now. In terms of office, the numbers are similar to what you saw in, in, in the last year or so.
Speaker 3: on the equity portfolio. So we have decreased office. And again, the LTV on the office portfolio as a whole is in the mid 50s, about 55% as well. So we think that we've got a lot of protection built in.
Speaker 3: to the mortgage portfolio. In fact, we did see positive ratings migration this quarter. So demonstrating the strength of the book, we have no mortgages in arrears. And so it's performing quite well.
Speaker 13: And sorry that percentage in office then is around 2025 is that. Is that right? Yes.
Speaker 13: Yeah, okay. All right. Okay. Second question for me, noticed a significant jump in insurance sales in India this quarter. Maybe you can just talk about what the driver of the big jump in sales there was and.
Speaker 13: if that's sustainable and kind of remind us how that flows through the JV and into earnings for Sun Life.
Speaker 14: Thank you. It's Ingrid Johnson here. What we saw in India was actually strong sales ahead of some tax regulatory changes to product attributes that would cause some of the earnings to be taxable downstream. So there was a fire sale or strong sale.
Speaker 14: Having said that, we were top three overall in our sales and given the momentum in the business, maybe not at that high level, but we expect that to continue. In terms of how this flows through, it would come through in the JV line. That's great. Thank you.
Speaker 7: Thank you. Our next question comes from Mario Mendonca with TD Securities. Your line is open. Good morning. This might be best suited for Dan. Dan, I'm looking at the segment ROE, the U.S. segment ROE, and I appreciate this disclosure. It's helpful to see. What I observed was a significant increase in ROE started around Q322. My explanation for this is that it was a sent request, but it may be more than that. Could you talk about how the fundamentals in...
Speaker 9: As I'm sure you know, especially back in the first quarter of last year, we had greatly depressed earnings due to very high mortality in the group life business related to COVID. So the margins started to rise, obviously, as that faded off from the experience. Secondly, as you know, the stop loss business has continued to perform very well and the margins have actually increased.
Speaker 4: I don't know if you would manage to comment on this but I also think there are some impacts from how DentaQuest blends into the results. I think if you look at the current level that we have, the 15% ROE, I think we feel very good about that. That incorporates the investments we have made in different businesses like DentaQuest. We see that continuing to go in that direction.
Speaker 7: I just expected those two to be essentially the same number, but they're different. If you help me think that through.
Speaker 5: Yep, thanks Mario. This is Kevin Warsia. I'll talk about that. I think that when you're looking at the different components of new business, one of the things you have to consider is PAR and non-PAR splits on the CSM contribution. And you also have to step back and look at all the different components going into the CSM. They do have
Speaker 7: different impacts in terms of how they interact and how they impact the amortization levels. So I won't go into all the details. There's a number of technicalities we may want to cover more detail next week, but that's probably how I would respond for today. Dr. John P.D. So just to close the loop on that, the amortization of the contract service margin over time hasn't really kept pace with the growth in the contract service margin.
Speaker 7: Another one of the insurers talked about how higher interest rates are having a depressing effect on the proportion of the contract service margin that amortizes into earnings. Is that a similar effect for Sunlight? Yes, Mario. It's Kevin again. Yeah, you're right. There is a key interaction, especially on the variable fee approach products that have embedded guarantees.
Speaker 5: And there's an interaction between the market movements, between the cost of guarantee liability and the CSM liability. And it has an effect of kind of dampening changes in the CSM amortization. So we think that's actually an attractive quality because it does stabilize our CSM amortization into earnings over time.
Speaker 5: between the market movements, between the cost of guarantee liability and the CSM liability. And it has an effect of kind of dampening changes in the CSM amortization. So we think that's actually an attractive quality because it does stabilize our CSM amortization into earnings over time. All right, thank you.
Speaker 2: Thank you. Our next question comes from Darko Mihilej with RBC Capital Markets. Your line is open.
Speaker 7: question on the expenses being a run rate. I thought I'd heard you say there were three things impacting it and then in my mind I thought okay well I should go lower as a result from a quarterly run rate maybe the interest cost sort of remains but why is it that it's a good run rate like a higher comp expected to continue for the rest of the year.
Speaker 15: IFRS spending, I guess, why would that unless you capitalize and expense it? Maybe you can just give me a hand and then just to touch it off. I mean, the whole other corporate sort of segment has a lot of moving parts. Maybe you can just wrap it all up by saying, look, this is a good overall run rate for that business in the model.
Speaker 4: things. Certainly the debt financing costs are more permanent and the compensation costs are really a reflection in most cases relative to our share price performance so that could move around.
Speaker 15: I'm just trying to understand a few things and I want to just go back to
Speaker 15: the expected investment result.
Speaker 15: And in many ways, when I look at the quarter, it seems to have been a fairly big contributor to the year-over-year improved results. And maybe it's not a great comparator, but I look at the investment, the expected core net investment results.
Speaker 15: result is up significantly quarter over quarter.
Speaker 15: So I'm just trying to get a sense of how you would characterize it.
Speaker 15: Is is the number ballpark now the number we should expect for the next few quarters
Speaker 15: I just want a little bit more clarity around how I should be thinking about modeling that. I bought some ideas, but the result I saw today kind of smashed my ideas.
Speaker 4: I think exactly right to your last comment. I would really focus on this quarter as a baseline darko because obviously last year there was a lot of movements in terms of how we transition to IFR 17. So if you look at the two biggest components of the investment income, there's the expected investment income and there's the earnings and surplus. Maybe I'll talk to both of those in turn to answer your question.
Speaker 4: So the expected investment income really includes sort of the two portions, which is the income that we earn on our assets backing liabilities, and that's really the spread over the discount rate on the liabilities. So that's one. The second one for the assets backing investment contracts is really the spread over the crediting rate. So if you look at how that number will move, obviously that's what's going to impact it. So how does the overall asset yields move?
Speaker 4: and of course how does the credit rate move on our investment contracts. And you combine that with our books going to likely grow so that's going to contribute to earnings overall. So that's kind of on the expected investment side and when you put that all together we expect that to be relatively stable.
Speaker 4: the surplus and we break it out in our slides, the core is what you should be focused on. The other elements in terms of gains can be lumpy from quarter to quarter because we are looking at opportunities in the markets on when to capitalize on that and the other items are just some accounting noise between derivative positions and cash positions that even out over time but you could see a little bit of noise in that quarter to quarter. On that one I would rely on the Ginny And then there is a generalsticks. There a scale between a quarter and quarter because you get liberal leadership chief chiefbox Pick J Vote
Speaker 7: Okay, thank you very much, Manjat. Appreciate that. I think I may want to follow up with you next week if possible. So thanks again. Sure. Thank you. Our next question comes from Nigel DeSouza with Veritas Investment Research. Your line is open. Do you have any tips for improving touch andhesi cutter delving?
Speaker 16: Thank you. Good morning. And just wanted to touch on the CSM balance. Correct me if I'm wrong here. I may have missed it, but it doesn't look like the CSM balances are disclosed at the business segment level. Just wondering what the rationale is for that and how we should think about changes in the CSM balance at the segment level and how that might impact.
Speaker 16: CSM amortization to different rates of amortization.
Speaker 4: across your business side, trying to get a sense of the runway going forward. I think if you look at the C-SN memorization, there are a few things that impact it, but broadly speaking, I think we expect that to remain relatively stable. The two business groups that really contribute to that are Asia, and the US, and the US, and the US, and the US,
Speaker 5: all of theeway around Canada as well As kills While Canada G satisfies Canada. And in Canada. succumbed horse you
Speaker 5: technical details going into this. I won't go into a lot here, maybe we can follow up next week. But the two things I will highlight for today is just some amortization will be impacted by mix of business. Cause as you know, it's amortized over the lifetime of the service of those contracts. And so that varies by the length of term of the business. There are also some intricacies related to VFA products and especially market moves and interactions with cost of guarantees and the CSM and how that amortization happens over time. So.
Speaker 5: There is the measurement model impact and then there is duration impact and mix of business and both of those interact together. What we have seen though is that number has been fairly stable as you look at our results the trendline is good. We have seen both the CSM amortisation and risk adjustment have been quite stable over time and we are very pleased to see that trend. Thank you.
Speaker 16: And if I could follow up on investment activity gains, when I look at 2022 on a comparative basis, it's about 8% lower on the IFRS 17, which is in line with your guidance. I think I remember you mentioning higher investment activity gains.
Speaker 16: and IFRS 4 contributing to the decline. So just trying to get a sense of how does that impact IFRS 17 results going forward. I think I understand that item now goes through net investment results. So just trying to get a sense of what the impact is on a go forward basis.
Speaker 16: So just trying to get a sense of how is that impact I've heard 17 results going forward. I think I understand that item now goes through net investment results. So just trying to get a sense of what the impact is on a go forward basis and what you saw this quarter from the investment activity game.
Speaker 4: I think the way it's going to flow through IFRS 17 is the spread benefit we were getting in IFRS 4 was being present valued and that's what caused the lumpiness you were mentioning in your investment trading activity gains under IFRS 4. Under IFRS 17 that spread will be recognized over time through investment income. REPORTER. NIGEL BERGEN. Just adding to that, you'll see that in the expected investment earnings line and that's one of the reasons why we've been developing the information standards and Gr scalability that provided us with a sort of a supportive
Speaker 1: Thank you. Thank you.
Speaker 2: Thank you. Our next question comes from JooHo Kim with Credit Suites. Your line is open.
Speaker 16: Hi, thanks, good morning and just want to go back to CSM another sort of modeling type question. First, I guess on the new CSM from Asia, really strong growth and there were some mentions about how we had really good results from sales from India.
Speaker 14: But I'm just curious if you could give a bit more detail on sort of what drove that almost doubling of new CSM balance from Asia, and then I will follow up. Thank you. It's Ingrid Johnson here. So just to note that in our CSM, we have some units that are not part of IFRS 17.
Speaker 14: So the joint ventures as well as Vietnam would not be in the CSM. So the sales of the units in the CSM are 27% up. So what we're seeing as a doubling is a combination of both the strong sales as well as then the product actions to improve margin for the benefit of client outcomes. So over time you should see the continued good run rate.
Speaker 4: And at the top of the house, sort of at the all company level, is there a reasonable range that you could guide us to for the new CSM? I mean, I think that obviously sales never move directly in a straight line overall, but I think what we have sort of said is that...
Speaker 4: we expect the organic sort of CSM to kind of be in the mid to low double digit growth range over time. Sorry, the new business CSM. Okay, gotcha. So that will bump around, but that's kind of, you're looking at over time, that's kind of the growth you should expect. I think Manjit's comment that it's dependent on sales, that's the closest linkage, and Ingrid mentioned that, that the combination of sales and...
Speaker 3: mix and pricing action. So our goal would be to, as Manjit said, is to grow that over time.
Speaker 2: Thank you. Thank you. Our next question comes from Lamar Persaud with Coremark Securities. Your line is open. Does it hand under the green system?
Speaker 3: Thanks. I just want to come back to the line of questioning on expenses, but at the consolidated level. So that $478 million in other expenses, that's been climbing sequentially for the past, I think, three quarters. But thinking about the growth rate forward, going forward, is it better to think about this on a year-over-year basis or sequentially when modeling this out? And then more broadly speaking, if we think about costs at the
Speaker 3: at the top of the house. So costs with IFRS 17 are coming off here and lower inflation. Should this drive the growth rate lower moving forward or are there other project related spends that could keep this growth rate elevated? Yeah, hi, Lamar, it's Manjit. So yes, I think there are a few elements that go into that number. So there is obviously, you know, where we've had inflation impacts coming through that number.
Speaker 4: You've heard about significant volume growth, so that's obviously included in that number as well. And there's also some currency impacts that impact that number. So some of those will move around depending on what's happening. But I think if you want to think about it on a core basis, I would sort of say overall in this environment, top line you're probably going to see 7% growth in our expense rate, including inflation which is running around 3.5%.
Speaker 3: and then our core business growth is growing at a similar rate. That reflects also some of the investments we're making into the business. Perfect. Yeah, that's helpful. That's it for me, just a quick modeling one. Thank you. We have no further questions at this time. I'll return thanks to Mr. Bitten for closing remarks.
Speaker 4: Thank you, operator. This concludes today's call. A replay of the call will be available on the investor relations section of our website. Thank you and have a good day.
Speaker 2: This concludes the program. You may now disconnect.
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