Q2 2023 Sun Life Financial Inc Earnings Call
Okay.
Good morning, and welcome to the Sun Life Financial Q2, 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.
This call is David Garg, Senior Vice President Capital Management, and Investor Relations. Please go ahead Mr Garg.
Thank you and good morning, everyone welcome to Sun Life's earnings call for the second quarter of 2023 are.
Our earnings release and the slides for today's call are available on the Investor Relations section of our website at Sun life Dotcom.
We will begin today's call with opening remarks from Kevin strain, President and Chief Executive Officer.
Following Kevin Mangan thing Executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
After the prepared remarks, we will move to the question and answer portion of the call.
Other members of management 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 with that I will turn things over to Kevin.
Okay.
Yeah.
Thanks, David and good morning to everyone on the call turning to slide four we delivered good performance during the second quarter. Our results demonstrate the continued resilience of our diversified business mix.
We are realizing from our recent acquisitions and strategic partnerships, our ability to execute on our strategy and the positive impact we continue to deliver for our clients.
We achieved strong underlying earnings for the quarter of $920 million, representing 14% growth over the prior year. The earnings growth was driven by strong results in our group health and protection businesses and our individual protection businesses.
Long side of resilient wealth and asset management performance Sun Life, Canada achieved record earnings this quarter driven by strong investment results and favorable insurance experience. So unlike U S. Also had a strong second quarter results, reflecting balanced contributions across the business, notably denser quest recorded the largest Medicare advantage sale.
In its history, bringing sales for the U S dental business to approximately $580 million since closing our acquisition in June 2022.
Sales in the second quarter are expected to add approximately 700000, Medicare and Medicaid members over the next year supporting our commitment to improve preventive care and oral health outcomes for our clients.
Made good progress in sunlight Asia with individual sales up 51% year over year, most notably Hong Kong insurance sales grew nearly four times over last year, partially driven by pent up demand with the reopening of the border with mainland China. This includes contributions from new called the agency teams and the newly opened Sun Gateway Press.
Steve client center.
The fundamentals of our asset management businesses remained strong MFS long term retail fund performance was strong with 98% and 92% of fund assets ranked in the top half of their respective Morningstar categories based on 10 and five year performance.
Well see fee related earnings increased 19% driven by higher AUM, reflecting.
Strong capital raising and deployment across the platform and the a M acquisition.
Assets under management are now 1.3 dollars seven trillion and are up 9% over last year supported by increases from both MFS and SLC.
Underlying are we for the quarter of 17, 7% continues to trend towards our medium term financial objective of 18% plus reflecting our disciplined capital management and sustained emphasis on capital light businesses.
We also ended the quarter with a strong capital position with a light cat ratio of 148% given our strong capital position and capital generation, We announced our intention to launch a normal course issuer bid to purchase up to two 9% of our outstanding common shares or 17 million shares subject to regulatory approval, we will continue to maintain flexibility.
The ability for other potential capital deployment opportunities turning to slide five this quarter, we delivered on several key business initiatives that drove our client impact strategy, helping clients achieve the health care and coverage they need to remain a top priority and we are leveraging our digital capabilities and recent acquisitions and strategic partnerships.
To make this happen in Canada, we continue to make progress in building a healthy ecosystem with holistic solutions and services for our clients.
Last month, we announced an agreement to acquire dialog health technologies, Kansas, leading integrated health and wellness virtual care platform that provides clients with access to affordable on demand quality care, we've been in partnership with dialog since 2020 and C. D. The incredible growth potential, but more importantly, this acquisition will allow.
O us to play a larger role in Kansas health ecosystem, and help Canadians navigate and receive care.
Sounds like Canada also launched aluminum health pharmacy provided by <unk> and online pharmacy, App that helps clients access knowledgeable pharmacists by chat or phone and.
And have medications delivered right to their door.
This service helps clients monitor their medications usage and refills, allowing them to easily access a managed care from the comfort of their home.
In our U S dental business, we expanded advantage dental plus by opening two new dental care practices in Texas. We opened these offices in areas, where access to quality oral health care is a challenge for children with Medicaid coverage in Asia, We continued to leverage our digital capabilities and product innovation to help clients with healthier lives in Hong Kong.
We introduced E Sun Pro our new digital health care platform that offers one stop comprehensive care clients have access to advanced treatment and support from the point of diagnosis to post treatment all in support of helping our clients focus on recovery and safeguard their health.
We are using our distribution capability to build lifetime parents of security for our client last quarter, we announced an exclusive bancassurance partnership with <unk> Bank in Hong Kong, We're pleased with the early sales momentum and progress in July demonstrating early traction from our from our new partnership and our commitment to leveraging quality distribution to meet the protection savings.
And investment needs of our clients.
And Sophie <unk>.
<unk> asset management, our U S retail distribution affiliate, which we acquired last quarter announced it will dispute distribute biggio I read a non traded real estate investment trust launch might be Joe supporting the needs of high net worth individuals. We're also embracing our responsibility to create a more sustainable brighter future.
In line with our commitment to sustainable investing this quarter, we announced our second sustainability bond issuing $500 million, we into it we intend to invest an amount equal to the net proceeds of this offering into green and our social assets as defined by our sustainability bond framework.
Additionally, SLC management continues to invest in assets that generate a stable and attractive yield with a positive environmental impact for example, infrared recently announced an investment in Georgia and E mobility company infrared investment and jolts rapid electric vehicle charging infrastructure supports a low carbon future and contributes to its target.
Achieving 50% of AUM invested in climate solutions by 2025.
Finally, we continue to maintain our position as an empowered and inclusive workplace. This quarter Sun life was recognized as one of corporate Knights Best 50, corporate citizens of Canada for the 18th time since 2002, driven in part by strong scores on executive gender diversity and board racial diversity in closing we're encouraged to see our business.
To grow as we emerge from the pandemic, we're seeing accelerated growth in Asia mortality experience being less impacted by Covid and morbidity experience improving we continue to monitor the macroeconomic environment closely with interest rates remaining high particularly at the short end of the curve.
But inflation is showing some signs of moderating the credit environment remains very stable and equity market performance overall was good in the quarter.
Allstate has been a headwind for us and for the industry recently, but we continue to benefit on a relative basis from a rebounds portfolio, reflecting actions taken over the past five years.
Asset management and wealth flows remain challenging, but we continue to outperform our competitors.
We continue to generate capital to support our organic growth.
The shareholder dividend the ability to execute on the right acquisitions or strategic partnerships like dialogue and tossing bank, while also supporting the buyback we announced this quarter.
Overall, we continue to deliver a positive impact for our clients, whether it's making health care more accessible creating strong investment performance or providing protection put simply helping our clients achieve lifetime financial security and live healthier lives with that I will turn the call over to manage it who will walk us through the second quarter financial results.
Thank you Kevin.
Underlying net income of $920 million and underlying earnings per share of $1 57 were up 14%.
Our strong market positions and attractive business mix across wealth and asset management group health and protection and individual protection helped to generate an underlying ROE of 17, 7%.
Wealth and asset management, which includes contributions from MFS and SLC management group retirement services individual wealth and asset management businesses in Asia, and Canada generated 40% of underlying earnings.
Wealth and asset management underlying earnings were in line with the prior year.
Lower fee based income, reflecting the impact of declining global equity markets was largely offset by higher investment income driven by volume growth and higher yields.
Group Health and protection, which comprised 35% of our Q2 underlying earnings continued to deliver strong earnings growth. This.
This includes our Canadian group health business as well as our U S stop loss employee benefits and dental businesses.
Underlying earnings were up 120, <unk> hundred $22 million driven by good premium growth favorable insurance experience as well as a full quarter contribution from dental Quest group.
Group sales maintained good momentum more than doubling from the prior year.
Individual protection represented 25% of our future earnings and includes our longer term protection businesses in Canada, and Asia as well as our runoff businesses in the U S.
Individual protection underlying earnings were up 23% year over year.
This was driven by improved insurance experience in Canada, and the U S as well as good sales momentum over the past year in Asia.
Total individual protection sales were up 45% from the prior year. We also generated new business CSM of $270 million during the second quarter up 43% year over year.
Earnings on surplus assets increased across our businesses, reflecting higher net interest income and higher of our higher realized investment gains.
Reported net income for the quarter was $660 million down 29% from the prior year.
Reported earnings for the quarter include Mark included market related impacts acquisition related cost and amortization of acquired intangibles.
Market impacts were primarily driven by unfavorable interest rate experienced reflecting a non parallel shift of the yield curve.
Given our current positioning as the yield curve normalizes, we expect to see favorable interest related market impacts and reported net income.
Real estate returns were relative flat in the quarter versus our long term expectations of approximately 2%.
We continue to view real estate as a key component of our diversified portfolio.
Over the last 10 years, our North American real estate portfolio has generated annualized total returns of over 9% above our long term expectations.
Our balance sheet and capital position remains very strong and sell off like kind of 148% was in line with the prior quarter the leverage ratio of 23% remains low.
Holdco cash of $2 billion increased by 1 billion from the last quarter in line with our prior guidance and.
And we continue to expect we continue to expect capital generation of 25% to 30% of underlying earnings over the medium term. This is after payment of common share dividends and organic investments.
Our strong capital position provides sunlight for the ability to execute on attractive opportunities as well as the resilience to absorb potential impacts from more volatile market conditions. These are valuable attributes in this environment.
Now, let's turn to our business group performance, starting on slide nine with MFS.
MFS underlying net income of U S $187 million was down 5% from the prior year.
This was driven by lower average net assets as well as a higher tax rate.
Reported net income of USD 187 million was down 18% year over year, driven by an increase in the fair value of share based compensation.
Pre tax net operating margin of 37% was up one point from the prior year.
My view is 589 billion was up 3% from Q1, the third consecutive quarter of sequential growth.
Retail net outflows of U S $1 7 billion in institutional net outflows of U S $2 3 billion, both moderated from the prior quarter.
Turning to slide 10, SLC management generated fee related earnings of $62 million up 19% year over year.
This reflects good capital raising as well as deployment of capital into fee, earning AUM over the past year.
Underlying net income of 44 million was down modestly from the prior year as higher fee related earnings and seed income was offset by favorable nonrecurring items in the prior year.
Reported net loss at SLC management was $3 million, primarily driven by mark to market losses on real estate, how the surplus account and acquisition related costs.
Capital raising a $2 1 billion was resilient in a challenging environment.
Total AUM of 218 billion was up 13% year over year.
This includes $21 billion that is not yet earning fees. Once invested these assets are expected to generate annualized fee revenue of more than $180 million.
Turning to slide 11, Canada delivered record underlying net income of $372 million driven by strong disability experience and higher investment income.
Reported net income of $210 million was down year over year due to market related impacts.
Wealth and asset management underlying earnings were in line with the prior year as higher investment income was offset by higher expenses.
Group Health and protection underlying earnings increased $48 million year over year, driven by improved disability experience from lower claim volumes and shorter claims durations.
Individual protection was up $25 million, driven by improved insurance experience and higher net higher investment contribution.
And earnings on surplus was up from prior year, reflecting higher investment income and realized investment gains.
Turning to slide 12 U S underlying net income of <unk> hundred $60 million was up $58 million from last year reported net income of USD $133 million was up $20 million year over year.
Group Health and protection underlying earnings were driven by strong premium growth a full quarter contribution from the <unk> acquisition favorable, but moderating insurance experience and higher investment contributions there.
The combined after tax profit margin for group benefits and health and risk solutions of 10, 2% was a new high watermark for the business. We're very pleased with the contributions of <unk>. We are winning new business are on track with our integration milestones and are confident that we will achieve our synergy targets.
Individual protection underlying earnings increased 12 million year over year benefiting from improved mortality experience and the inclusion of the retained portion of our U K business.
Slide 13 outlines Asia results for the quarter.
Underlying net income of $150 million was up 25% year over year on a constant currency basis.
Reported net income of $122 million was up from last year due to lower market related impacts.
Wealth and asset management underlying earnings were down slightly reflecting lower fee based earnings.
Individual protection earnings increased 33% year over year on a constant currency basis.
The increase reflects higher premiums from good sales momentum during the past year as well as improved expense and lapse experience and our joint ventures.
Individual protection sales were up 50%, primarily driven by strong sales growth in Hong Kong, China and India.
New business CSM for Asia was $118 million up 64% from the prior year.
This was a good quarter to end the first half of the year. We are entering the second half with positive business momentum, while the operating environment remains uncertain, our core strengths of our diversified and attractive portfolio of businesses, our strong capital position and a talented team supported by great culture, where service well as we focus on delivering on our purpose of our.
Clients and driving future growth with that I'll turn the call back to David for Q&A.
Thank you.
To help ensure that all 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 let the operator poll participants.
Thank you if you'd like to ask a question. Please press star one one.
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Your first question comes from many Grumman of Scotiabank. Your line is open.
Hi, Good morning, I wanted to ask about the big increase.
In underlying experience gains are very positive.
Sequentially and year over year, and if I look at the limited history would suggest that this is sort of that.
The upper end of the range a more normalized level would be would be lower so really what I wanted to understand is how sustainable this number is.
Is it reasonable to head lower.
Think about earnings from a run rate perspective.
<unk>.
Are there any offsets this quarter that you would highlight.
On the opposite side to consider as well not just focus on the very strong experience.
Manny we're gonna, let Jacques start because a lot of the experience comes from the group benefits businesses and then Dan to follow up on the experience in the U S.
Thank you Kevin and thank you for your question Indeed.
Very good experience in morbidity in particular on the group side.
As a quick reminder, let's say important to focus on three main items, when we talk about morbidity experience.
First is the claims volume.
Durations and also the pricing actions, which as you might remember we started taking in 2019.
So the claims volume was indeed lower than our <unk>.
Expectations and the durations were shorter.
So.
One of the things to keep in mind is we don't typically fully control their claims volume, but I would point out that there is some seasonality in Q2 is usually a little bit lower among the four quarters.
On the duration side.
We've put in place many a number.
A number of items or solutions to help both plan sponsors and plan members as an example.
We provide a mental health coach to plan members in Canada, and what we've noticed is that durations shorter for people, who use a mental health coach and sometimes they don't even go on visibility to start with.
So in terms of how sustainable is it all.
I did a little bit of an exercise looking at the last five years and what the experiences on volumes and duration.
And we're not that far from the five year experiences like so no.
I would expect that we are able to continue that that being said, it's tough to predict the main item I would leave you with is what I saw.
And earlier.
Key driver for us.
Moderate.
Pricing actions we've taken.
It's something we continue to remain very vigilant and stay very close to and when needed we make some short term adjustments so.
As I said.
We're probably not going to repeat 24% every single quarter from here on.
We feel pretty good on how we're managing claims overall in morbidity.
Suggest that I feel very confident about our npls of course.
Hey, Thanks, Scott, Thanks, Jacques and good morning, Manny This is Dan Fishbein.
First of all I would say that experienced gains, especially in businesses like disability stop loss and dental are often an indicator of good business results better pricing than expected better claims management and we've invested in our businesses to improve our capabilities and we're certainly starting to see.
The results of that.
As far as specifically in the quarter.
The story of the quarter is this is a more normalized result, really the first quarter since the pandemic began that we've seen what we would consider more normalized results mortality.
Was.
Was on expectations for the first time and then morbidity as you noted was quite strong in <unk>.
Our stop loss business I'm sure you've noted that the prior quarter and the fourth quarter of last year had exceptional results. As an example, we had a 63% loss ratio in the first quarter, we priced to 72 and a half. So we've seen some moderation as you would expect in that result in the second quarter and in fact, the second quarter.
We are still favorable.
But.
More close to our pricing targets, so a more sustainable level.
In the group business, we had one of the best results that we've ever had in the second quarter and we've said throughout the pandemic that the group business had undergone great improvements. It was just hard to see it through the mortality experience. So if COVID-19 and now we're seeing that.
Gives me emerge really quite clearly so a very strong quarter in disability, especially in the group business and then a strong quarter in dental as well know theres some seasonality in the dental results.
First quarter is a high utilization quarter people using their benefit second quarter.
More moderate.
Quarter, So youll see some higher results in dental, but overall I would characterize this as a more normalized result, and you certainly could interpret that is more indicative of future patterns.
And Manny maybe I'll chime in on your last part of your question around other items that you should think about relative to these results. So I'd note a couple of things. So obviously as Jacques and Dan mentioned the businesses have done a lot of work to generate the favorable experience that youre seeing and thats generating good results. So that's also factoring into our compensation accruals so that.
It shows up in our expense line.
The other part of that would be is that given the strong results, we're seeing in Canada and the U S. This year, which are higher tax jurisdictions that is resulting in a higher tax rate you'll note that in the quarter. This year for this quarter and the third thing just to remember about this quarter is that we've also had the sale of the UK business.
This quarter and so that's showing up on different elements of the deal this quarter.
And Manny I was just going to outline one last thing if you look at this experience again, it's primarily coming from the group businesses in Canada, and the U S and Canada, we're a market leader and have scale and great digital capabilities and I think Josh talked about how to think about that and in the U S.
Top top four player if you look across our businesses and Dan all of his business is now with the addition of Dent to quest, we saw having having scale and performing well. So again, we have great digital capabilities in the U S and.
Things like clinical care on top so it's really driven by the work that Jacques and Dan are doing to drive the business.
That's good detail and Thats. It from me. Thank you.
Thank you. Our next question comes from Gabriel Shane of National Bank. Your line is open.
Hi, good morning, just on the.
On the CRE.
Negative experience this quarter.
It's a pretty big number and we've had four quarters in a row and you alluded to the long term track record of generating 9% returns and all that I'm. Just wondering if you can give us a sense of what kind of marks have you applied.
So far over the past several quarters.
Conservative are they and what the.
At all possible to give an outlook for what.
Kind of investment experience we.
We can see from the CRE book.
Coming quarters.
Gabriel It's Randy Bryan. Thank you for the question.
The negative youre seeing as you indicated.
The difference between the long term expected return and the actual economic return so we sell value.
In aggregate on the portfolio down about 1% on the quarter.
But the total return.
Essentially was flat.
It incorporates income.
Into that into the total return so we do have a large and diversified real estate portfolio in different parts of it.
In different ways. So as you would expect we did see price decline in Opex.
We did see industrial up.
Again really driven by rental growth increase in multifamily retail were essentially flat if you look at.
From peak U S office, we mark down about 24%.
And Canadian up it's down about 16% because those two markets have different dynamic as you would expect if you think about the second part was really.
Outlook, I guess I'd start there by saying, we like commercial real estate a lot long term portfolio and continue to believe that.
<unk> part of a large diversified unmatched portfolio like ours, we've invested in the asset class for a decade and really use it to back long dated liabilities.
As I mentioned on prior calls and mentioned in the opening here. We are actively repositioned our real estate portfolio over the last five years to prepare for a market down.
Downturn and have delivered returns well above our long term.
Expectations over the last decade, all of that being said like all asset classes bonds stocks and others prices go up and prices go down right now we're on the downward part of that cycle. It is hard to predict future return.
But we do expect a.
A little bit more weakness in office as the impact of Covid in varying returned to office policies.
Play out.
So one thing to keep in mind we.
We are not for sellers, we are not leveraging our real estate.
Average hold period of between 10 and 20 years prior buildings in North America.
Cash buyer, we have the ability to weather.
These changes in valuation and actually can benefit from a position of strength. So we're long term investors and we believe in real estate we have.
Well balanced diversified portfolio.
And expect it to perform well.
Especially when you compare it to the broader market.
Okay great.
Some response, just wondering were there any default in the mortgage book because we don't believe if there were that would be an investment results.
Yes, so the answer there on CML portfolio.
Portfolio has held up remarkably well.
12 consecutive quarter, we have Noah.
So average LTV of 53% debt service coverage about one seven.
No impairments no arrears.
So we have we have a well diversified portfolio.
Okay, great just shifting over to Asia.
I heard the sales momentum is improving there.
A couple of things what kind of products are picking off first I guess and then.
Storage I believe Sun life, maybe less than 15% of your sales had come from mainland Chinese I'm wondering what your strategy is now in the immediate future.
Why or why not but may have changed.
Are you targeting more high this is Andy Johnson from Asia in Hong Kong.
Turning to the products they seeing a similar as in the past where they typically traditional life insurance offering.
Oriented towards retirement and legacy planning.
If we then look at the actual underlying momentum.
Got it helpful and had made preparation and anticipation of the border reopening with mainland China.
Terms of the pre pandemic level of sales that was roughly around 10% to 15%.
We're now seeing this being more than double that with still good momentum and as Kevin mentioned, the dusting bancassurance relationship agreement as those to activate it and we're seeing good momentum together with the opening of.
Sun Life Gateway Center in Sunset Choi. So generally we've looked at let's say innovative products just to make sure that we are relevant for towards the society. We save and then we're seeing momentum in the other markets, principally India and China.
So why that shift in mainland Chinese product barrels.
The strategy has obviously changed.
So the strategy hasn't changed we are better positioned to be able to take advantage of that.
Alright.
Kevin gave I was in Asia, and fab pre pre the Covid time, and we've been building capabilities for last 234 years to tap into this market as it opened we probably lacked those capabilities. We wish we would've had five years ago that we have today and that has helped us to gain more mainland Chinese visitor business.
Great follow up on that offline.
Thank you.
Question comes from Doug Young with de Chardan. Your line is open.
Hi, good morning.
First question just for Dan, obviously with that request and EEP.
<unk>.
<unk> produced in sales this quarter I mean, how are you.
Are you feeling relative to your accretion expectations from from that business. It seems like things are performing.
Essentially better than expected is there an opportunity to get more than you had originally anticipated.
Well, so we're feeling very good about our original projections, but there's various puts and takes and some things a bit different than we had initially projected.
I would expect probably the biggest headwind then this is well documented at the end of the public health emergency that occurred on May 11th and the re certification by all the states of their Medicaid membership, we had projected losing a certain amount of Medicaid membership as a result of that but over a two year period.
It does appear that the states are processing those re certifications more quickly than had been anticipated. The overall projections for membership loss or about the same so far although a bit hard to predict.
What we had projected but there could be some short term pressure there on the integration side. The integration is going very well, we actually are now projecting having more expense synergies than we had built into the model and on the sales side. As you noted we're really getting some extraordinary results.
In the first 13 months since the acquisition closed we've had $580 million in new sales.
Majority of that although not all of it is government programs and we've essentially had no lapses on the government program side and just to put it into perspective that $580 million in new sales is more than 20% of the revenue that was in place as of the date of the close so we think any issue.
<unk> related to pag would likely be made up with the very good sales results.
Yes.
I appreciate the color and then maybe just sticking with you Dan.
S group benefit margin, it's just built.
About 10% this quarter, it's down from the last few quarters, but your target, 7% seems like we're migrating down towards that 7%.
Is that the trajectory that we should be anticipating give.
Given the normalization potentially in stop loss as you renew next year.
How do we think about that U S group benefits margin relative to the target over the next year to two years.
Yes, well the group benefits margin that we report is.
Does not include dental rate. It historically has it doesn't include the <unk> government programs. So it's really a stop loss and group margin and actually that was 10, 2% on a trailing 12 months basis, which is the highest that we've ever seen.
We are considering whether or not we should recast that at some point to include all of the dental business. Some changes minor puts and takes under <unk> 17.
So more to come on that but I think the story. This quarter is that we have seen the emergence of the very very strong margins in the group business, meaning group life disability and voluntary as I mentioned earlier with the relaxation of Covid mortality impact, we're now seeing the impact of all the <unk>.
Great improvements that that team has been making to the business and it's starting to make a significant contribution.
Two our results, including the margin the stop loss margin. Obviously this quarter has moderated some versus the prior quarter, we would have expected that.
But in the aggregate it drove the margin up to 10.2 with the improvements in the group business.
Okay I'll leave it there thank you.
Okay.
Thank you. Our next question comes from John Aiken of Barclays. Your line is open.
Thanks, I wanted to follow on Gabriel's line of questioning and grid. If I may two two things specifically the Hong Kong can you talk about the bancassurance agreements and in terms of I know, it's early days, but what products you are actually being sold through the bancassurance.
Channel and if Thats, what you want or if you wanted to ultimately move to a different.
Set of products and secondly.
The Gateway client center.
You mentioned the region I apologize I'm not familiar with that is this specifically for mainland Chinese visitors or do I actually have the intentions for that client centered in correct.
Hi, Ed.
Evening from Hong Kong.
On the products, we made sure with our bank assurance.
The agreement, we will and the relationship that we would have products relevant for different client segments and that they would cover the full range of what clients would need from savings protection legacy planning.
A combination of those products that we're finding are being sold.
All of the branches that we are present, so we're really pleased with that.
And then from the Sunset Choi is actually on the Calvin side and is positioned to attract the mainland Chinese visitors and individuals that are also.
Hi, Nick with clients and we have a dedicated team of unfair financial advisors and client support.
Presentative. So this is a very nice presence that we haven't had before.
And even the client center is something that your competitors also has or is this something innovative.
<unk>.
So it's something that our competitors have had but we've raised the bar because ours is really beautiful.
Great. Thank you very much.
Okay.
Thank you. Our next question comes from Tom Mackinnon with BMO capital. Your line is open.
Yes, thanks, very much just a couple of questions first wanted to start off with a line. That's called other expenses just looking at these things just quarter over quarter.
Asia is where you had a lot of growth that's only up 4%, but if I look in Canada, it's up six.
The U S. It's up 20% in Canadian and U S dollars just quarter over quarter and in the corporate segment itself.
About 11 or 11% quarter over quarter. So.
I think Matt you mentioned comp accruals, but are there any other items that are driving that number to be up.
So much sequentially and probably the highest it's been over the last six quarters of course and.
So just some color there and I have a follow up thanks.
Sure. So maybe I'll just first of all start with highlighting what's in that other line. So it's really four main components that go into that other expense line. So the first is non directly attributable expenses and these are expenses are generally related to.
Expenses are initiatives that support the entire business group and therefore are not included in the insurance services asset management of our other fee income lines of the dough.
So some examples of that would include marketing and support advertising in our functional support for the business group and <unk>.
Strategic initiatives.
Across all the business units within the business group the second item it would be sort of corporate cost that we have and so those would be cause for groups like enterprise finance risk legal strategy et cetera.
This would be performance leader compensation that you mentioned, Tom and the fourth would be debt cost. So if you kind of look at the increase quarter over quarter. Most of that increase this quarter was related to compensation related factors and that was really driven by the fact that we have equity related compensation and one of the main drivers of that is sun life's relative.
<unk> share price performance versus our peer and for the first half of the year, we were outperforming.
And is this a true up that happens kind of more seasonal or is.
Or are we just establishing a new trend here.
When we look at it regularly Tom and when there is an amount that we think we need to true up for we do.
Okay. Thanks, and then if I. Thanks for the additional disclosure here on capital generation, that's great. So if I put that together with your $1 48 light cat that includes.
$2 billion in it.
<unk> cash.
Launched a buyback.
So it hasn't done a buyback in a while and I seem to recall that when they've had one they've been active so let's take us take us through your thinking with respect to the buyback and.
Is it just a buyback for window dressing purposes, or do you plan on being pretty active here.
Tom It's Kevin.
We certainly wouldn't announce a buyback that we weren't planning to execute so we plan to execute on the buyback over the next 12 months subject to regulatory approval as I mentioned in my earlier notes so that is in.
As you mentioned if you look at what we did in the past we were we were active on our buybacks.
And.
What about still sitting on a lot of capital that's not going to probably chew through too much of it and you're generating so much how should we be thinking about that I mean, a high class problem to have but.
Thoughts there.
Well you make a good comment I mean, we continue to think that we can do the buyback as we've announced and have capital to give us flexibility to add scale and capabilities through M&A, when we need to and to support organic growth in our dividend. So.
We've sort of tried to balance all of these factors and that's how we've determined the amount of the buyback. We are obviously looking at our pipeline and where we see everything that happens in terms of M&A and all of our businesses and we think we've left herself with enough flexibility to continue to be active if there's things that we need to do to add either scale or capability of course with our.
Financial discipline. So we don't do M&A, unless it's going to add to our mto's and unless we think we can execute so if you look at the.
The past few years, we think we've been pretty disciplined in our deployment of capital.
Okay. Thanks.
Thank you. Our next question comes from Mario Mendonca with TD Securities. Your line is open.
Good morning sort of along the same lines as Tom is going at the last time.
Sunlight pattern in CIB and actually execute it on it was back in 2019 Ken.
Kevin has something changed.
More recently that would encourage you to have an in CIB and act on it is it just that sun life's producing capital at a better clip than it has in the past what caused the change.
Well you remember that during Covid you were not allowed to do a buyback program. So that was that was part of it and then we were implementing <unk> 17.
And as we came through 2017, you can see our leichhardt in capital strength numbers and so that's got us to the place that as we look at the pipeline and where we're at I should also mentioned we did the <unk> acquisition during Covid as well, which was a significant user of capital. So the combination of again.
We deploy capital we step back and look at what do we need for organic growth, what do we need to support the dividend and our dividend growth.
And what's our M&A pipeline look like so that's the discipline we have.
That's sort of where we stand at this at this point.
Okay, and then maybe you referred in your opening comments too when the yield curve normalizes you'd expect it.
You see some kind of reversal of those market charges. When you say normalizing do you mean, when the yield curve Steepens further is that what youre getting at.
So maybe I'd like Kevin Morrissey comment on that.
Sure Mario it's Kevin Morrissey here.
Our exposure really is to the yield curve inversion and what we saw this quarter was was more in version. So the shorter rates went up by about 50 basis points more than the longer rates. So what.
Andrew was referring to in his opening remarks, where if the yield curve flattens from year or normalizes upward sloping based on your current risk exposure, we would see those gains reflected in reported earnings.
Thank you.
Yes.
Thank you. Our next question comes from Paul Holden with CIBC. Your line is open.
Thank you good morning, So first question of.
Regarding advisors asset management wondering if it is starting to make a contribution to the <unk>.
<unk> four cell C.
And if it hasnt yet when should we expect the contribution to <unk> to start.
Paul It's Steve Peacher. Thanks for the question. So there's been a lot of activity since we closed with a with.
With the different affiliates getting new products launched so most specifically bento Greenough VGL has gone live with what decline there which is in industrial.
Non traded REIT that is through the SEC, we've still got to get through some states on the Blue Sky meetings have started in the process from here once you get the product live and we're working on one with Crescent. That's a few few.
A few months behind a perpetually private BDC, but we're actually already acquiring assets.
Then.
Then you really start working with different.
Different platforms the wire houses.
Alright.
The independent broker dealers to get those products approved on their platforms, you can't really go out and start.
Talking actively to the financial advisers on those platforms until you get the product approved at the home office and we started that product before we start that process before they are live I would say AAM does with the affiliate, but those those platforms don't really engaged until they've got a product that is kind of ready to go. So we are in the right in the thick of that now.
Those different platforms and the wire houses.
Is that can that usually takes longer at the wire houses tends to be quicker.
I think that's going to take us pretty much the balance of the year.
And then I think next year, we can really start to see assets moving into those funds and the other the other comment I'll make is the eyrie. The bto product that's a seed portfolio that's over $1 billion. It's already bought its a great portfolio a focus on the industrial sector.
So thats ready to go and as I mentioned with <unk>.
With <unk> products, we're in the market building a portfolio.
Now and we're a few months behind <unk>.
<unk> in terms of getting getting that product for the SEC. So so we haven't been raising money yet in those products a few months ago to kind of get those the approval process going I think it's 222020 for that in terms of money flowing.
Okay. That's helpful. Thank you and then my second question also related to <unk> I mean, we continue to see pretty good.
AUM growth and you're well on track to hit your 2025 target.
But.
I don't really see the same momentum in underlying net income could you give us a sense of.
When we should expect that to start and reflecting higher and maybe it's related to the first answer and just has to get worked through some of these additional expenses on getting the product approvals, but I'd like to understand that a little bit better.
Yeah, what I would point you to Paul.
Yes, I think the best earnings measure to follow to follow the health of the business and you see it in the supplement.
I think it's on.
Page 13.
We report fee related earnings and fee related earnings are really are very common.
Measure in the business.
For these kind of alternative businesses and thats going to flow and that's kind of the purest.
Demonstration of our earnings and Thats. The four minority interest this before taxes. It's also importantly before.
Seed income and the cost of that the financing cost of that sheet income all of which also.
Flows to underlying net income so I would first say look at fee related earnings.
If you look at that this year, we're up double digits over last year and that will track generally fee related revenue.
On underlying net income I think what youre going to see a little bit more volatile than that number because it includes seed income, which I think this quarter. So much of a normalized number or if that's kind of bounce around a little bit. It includes we have some share based compensation. That's going to include that it's going to include minority interest that's going to include taxes.
So.
Some of those things are going to market to move that number around a little bit.
And I think we saw that this quarter. If you looked at if you look at.
Underlying net income.
From a year ago, it looks like it was flat.
There are a couple one time positive benefits to last year's number if you normalize.
For that.
Underlying net income quarter.
This quarter over last year was up probably close to 20% so.
I hope that wasn't too convoluted answer, but I would really focus on fee related earnings attracting earnings.
Let me ask a different way because I think the guidance you sort of said it was based on underlying income for 2025, and you got an AUM target plus at an underlying income target and it just looks like the profitability if I simply take underlying income relative to <unk>.
Is not tracking to those objective so has something changed in the profitability of the business or again is it just a matter of.
Maybe maybe execution against strategy and getting past certain cost to improve those profit margins I guess, that's what I'm trying to understand what really.
Well I would say are our targets and our expectation that we are well on track.
To hit those targets that we set out in Investor day, and we feel very good about those and I think in terms of the expansion of the margin as.
We've been growing the topline AUM is up a lot fee related revenues purely earnings are up but with the same time, we have been investing to grow this business and generally in this business that means some investment in systems, but it means a lot of investments in people.
Sales people investment people I mean, our expectations for the potential of SLC are very very high and we want to make sure. We've got that foundation I think youre going to start to see margins improve over the next couple of years as we can scale back some of those investments to make sure. We're set up for the future and the revenue from growing AUM starts to increasingly fall to the bottom line.
So I think youre going to see margin improve as we don't have to invest as much to make sure. We at the foundation for future growth.
Okay. That's great. Thanks for thanks for your answers.
Yeah.
Thank you. Our next question comes from to Hoe Kim of Credit Suisse. Your line is open.
Hi, good morning, and thanks for taking my questions my personal ones with MFS.
I'm wondering if you could comment on the net flows.
Throughout the quarter.
And whether there were any changes in the flows given that equity markets sort of gradually improve over the quarter. So wondering if you. If you saw any improvements in flows as we move through <unk>.
Two months.
Business.
Hey, Good morning, this is Michael bearish.
The biggest driver of this year and relative flows has been what's going on in the retail channel and this is true of the industry.
So relative to last year, where redemptions were elevated given the challenges in both fixed income and equity products, we've seen redemption rates normalize, but what we have not seen yet as sales normalize and so industry sales are down substantially relative to a couple of years ago, and we've not seen those normalize and where we see that money going is given where cash rates are around.
The world in the U S, 5% and cash in Europe less than that as clients are sitting on cash relatively safe cash at relatively high levels.
We've seen this historically the market's pricing the fed to begin to lower rates next year. If in fact that plays out we think some of that cash is going to make its way back into investment products. We've just got to wait for that cycle to kind of play out, but it's less around what's happening in MFS and more around what we see happening in the industry. We track and this is in the U S where we have data we.
Our share of active assets in the U S relative to our flows.
Relative net flows are running well below our share of assets, which means we are outperforming relative predict.
On the international equity and fixed income side, and so what's driving that as industry, we think thats not going to normalize back to those levels until the fed begins to bring policy rates down.
Thank you and just on other expenses this quarter again, and I apologize if I missed it but just specifically for that variable compensation.
Think accruals there I'm curious if you could attribute that to different lines of.
Businesses I'm wondering if there is any major drivers of results from certain segments and what are some I guess more importantly, what are some levers that you have to sort of pull down or dial down expenses in that other expense line.
Overall going forward.
So good morning, Jus Horowitz management, so I would say that it's really across all the business groups. We've had very good performance across all of the businesses as you've heard this morning and the second factor is I mentioned is also related to our equity equity performance, which would also cut across all groups.
In terms of just general approach to expenses and I would comment that we have we are have been and are focused on disciplined expense management. That's really reflects our owner's mindset philosophy that we have in the way that we run our business, but at the same time.
We're investing to support our business growth.
Ensuring that we are also invest to ensure that we have good business controls and our capabilities and also making sure that we're attracting and retaining the best talent. So all of those show up in the expense line, but they're also helping to support the business growth that youre seeing so we feel very good about the investments, we're making in the business growth driving but at the same time. We are also keeping a very close eye on that.
<unk> growth.
Perfect. Thank you that's it for me.
Yeah.
Thank you. Our next question comes from Lamar Prasad with core Mark Your line is open.
Thanks, I'll just start off on the CSM here, so one of the points on CFM growth year over year.
It's 8% from an organic growth mostly from management actions can you break down exactly what you're referring to there.
Okay.
Kevin Marcy for you Ron.
Yes.
Omar I'll take that question, Kevin Morrissey, what we saw in the organic is mostly related to the assumption and message changes and that's where there was a change in Hong Kong, where we had.
The adjustment to our pricing philosophy and that resulted in an extension of the contract boundaries and as a result of that we setup more CSM for that business.
Now that piece alone was about $240 million.
But it didn't have an impact on income because there was an offsetting change andi.
On the other actuarial liabilities so.
No impact from that change on earnings, but a significant increase.
Inorganic.
For the quarter.
Okay. Thanks, and then.
The CSM I want to start off by saying, Thanks again for the segment disclosure I found it helpful.
The new business Sandra.
$270 million.
Can you talk to how much of that was driven by the strong sales growth and how much of that was the mix changes in Asia sales growth part, we can see but the mix is still a bit tougher to understand but I'm. Just wondering really is there anything onetime in nature. There that we should consider seasonality in that $118 million that went through in Asia or is that.
Good.
Starting point for Asia for Q3 and Q4.
And may be it for me.
Mandate.
No you go ahead Im sorry.
So I was just going to comment on Asia, and the magic in bringing to the whole of degree.
So we really have been focused on.
On quality products way, we've been looking at margin expansion, which have been the one contributor and thats principally in the high net worth business.
Second is on sales volume for the exited Iraq.
<unk> has driven the underlying momentum then clearly the strong growth in Hong Kong has contributed to that.
And then we also.
Affected by the mix.
Can reverse engineer to see a margin of roughly between 40% to 55% just depending on the mix in a particular quarter, but we do see very strong underlying momentum and the new business TSM Grace will be reflective of that.
<unk> momentum.
Okay.
That's helpful. And then you guys can call out Canada, specifically, but there was some good growth in EBIT.
Canada as well can you provide some color on what drove that.
<unk> I'll take that question and yes, there's good growth in new business, it's predominantly driven by our power products, but there's also a little bit.
In Universal life.
And some of our individual wealth and insurance products.
It's a lot of it is par.
Okay. Thank you and then.
Just for Dan on my next question that 10% profit margin, we see that number climb.
Quite consistently over the past year I would've thought that competition with therapy, you wrote some of that at 10% profit margin in group and it continues to go higher and it sounds like you referred to some management actions in that profit margin can you talk to what.
Changes you guys made.
From a management action perspective.
The stop loss business.
Yes, just how material is that right.
Margin.
Sure we continue to build out capabilities in both the stop loss business in the group benefits business in <unk>.
<unk> and Kevin mentioned this earlier, we added Pinnacle care advisers for example, pinnacle care as a health care navigation business that really differentiates our stop loss business from others, because instead of just reimbursing claims were actually helping people in those situations that lead to stop loss claims.
We've also continued to enhance our digital capabilities and our sales capabilities in the stop loss business. So we continue to earn.
Above market margins, but this quarter the biggest impact was in the group business group life disability and voluntary.
We've seen really strong growth over the past year 13, plus percent and Thats. The result of improved claims management capabilities, new industry, leading digital capabilities, particularly to help employers when they set up with us as a new account, including API is that integrate us with a number of the leading.
Payroll systems, and we've also added staff and expertise to claims management to help get people back to work. So all of these things contribute to favorable experience and strong margins.
Yeah.
Thanks for the time guys.
Thank you our last question comes from Nigel D'souza with Veritas investment Research. Your line is open.
Hi, good morning.
My question just wanted to touch again on Houston balance at this segment.
Level when I look at the beta CSN amortization, so the amount of CSN amortize relative to CSN balances it looks like that rate has been lower.
Particularly for our Canada, and Asia wondering if theres anything.
That you would point to that's driving that or is that simply just a function of.
TSN balanced growth.
Yes.
Kevin Morrissey do you want to take that question.
Sure Nigel it's Kevin I think when you look at the <unk>.
Amortization the thing to keep in mind, there is that other amortization, Gary quite a bit by the <unk>.
Mix and so we see quite a variability across the business groups and so based on the changes in mix and the sales that are coming in you might see a bit volt volatility in that from quarter to quarter. However, we do expect to see that pretty stable in that range of 10.
The 10% that we quoted.
Okay. That's helpful and the last question was more conceptual just trying to understand the outlook or experienced gains gains.
Do you expect it to be sustainably favorable just wondering why.
Eventually show up either as a change in the actuarial assumptions enough David.
Actuarial risks or.
So often premium pricing and kind of lowering premium rates to CE mark.
Sure.
And to understand longer term.
Favorable gains.
Favorable experience Keith Chau from one of those two.
Items.
Kevin Kevin strain I Wonder if you.
I can say I wonder if you could answer that but I do think that both Jack and Dan gave really good answers in terms of how to think about it for the group benefits business. So I wouldn't want to repeat that but maybe Kevin you could talk about how we look at experience gains.
Sure Nigel it's Kevin Morrissey I think you have the right concept there that ultimately over time the experience is going to get updated in either the actuarial assumptions that go into the liabilities or through the pricing when that gets renewed. So I think I think that is the right way to think about it I think maybe the difference here is just the time horizon.
Your experience studies are done and we do that we do them every year, but we look over a time horizon of multiple years and they can get updated.
Periodically from time to time based on that experience. So overtime I think youre right, but I think over that short to medium term.
Probably best to think about it in the way you said it was described by both Dan and Jacques.
Yes, I would add to that that the group businesses are shorter duration businesses. They are repriced.
On a different sort of way than individual businesses. So you have to think about group and individually and group and individual differently.
Okay, and just a minor point of clarification.
Experienced gains is that is that specific to sunlight that senior managing risk better and the claims.
Experience is more favorable.
That's something specific to you or is that just reflected the <unk>.
Industry experience I'm trying to get a sense.
What's driving that capability.
Yes, Nigel I'll start off commenting from a high level across all the businesses. So I think it's really a combination probably of a number of factors, which you measure and James you know one of them is the overall experience that could cross the industry. Some of it is related to your specific risk selection and risk management and the other dimension is the <unk>.
Are you seeing as well or it's mentioned that factors into the experience.
So I think it's really all three of those that have flipped interface.
Okay. That's really helpful. Thank you.
Yes.
Thank you we have no further questions at this time I will turn things over to Mr. Garg for closing remarks.
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 everybody and have a good day.
Thank you for your participation. This does conclude the program you may now disconnect everyone have a great day.
Okay.
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Okay.
Okay.