Q3 2024 Sun Life Financial Inc Earnings Call
Good morning, and welcome to the Sun Life Financial Q3, 'twenty 'twenty four conference call My.
Gail: My name is Gail and I will be your conference operator today.
All the lines have been placed on mute to prevent any background noise and the conference is being recorded.
After the presentation there'll be an opportunity to ask questions to join the question queue. You May Press Star then one on your telephone keypad.
Your host for today's call is David Clark Senior Vice President Capital Management and Investor Relations. Please go ahead Mr. Garg.
Speaker Change: Thank you and good morning, everyone welcome to Sun Life's earnings call for the third quarter of 2024.
Speaker Change: Our earnings release and the slides for today's call are available on the Investor Relations section of our website at <unk> Dot com.
Speaker Change: We will begin today's call with opening remarks from Kevin strain, President and Chief Executive Officer.
Speaker Change: Following Kevin Tim Deakin, Executive Vice President and Chief Financial Officer will present, the financial results for the quarter.
Speaker Change: 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.
Speaker Change: 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.
Kevin Strain: Thanks, David and good morning, everyone turning to slide four we had a strong quarter for profitability for financial strength and for growth. Our EPS was $1 76 up 11% ahead of our medium term financial objective of 8% to 10% both underlying and reported earnings exceeded $1 billion showcasing the power.
Kevin Strain: Of our diversified business platform, the strength of our client impact strategy and our focus on execution.
Speaker Change: We maintain a strong capital position, reflecting our financial discipline and capital light businesses.
Speaker Change: Underlying ROE for the quarter of 17, 9% was in line with our medium term financial objective, while our light cat ratio. That's a laugh remained strong at 152%, we announced an increase to our quarterly common share dividend consistent with our medium term objective for a dividend payout ratio. We also bought back 146.
Speaker Change: A common shares as part of our share buyback program.
Speaker Change: The business continued continues to produce capital and cash consistent with our objectives and both the dividend increase and the share buybacks demonstrate our strong capital generation and our commitment to return capital to our shareholders.
Speaker Change: We achieved solid growth across all business groups, driven by Canada, and U S Group Health and protection sales that were up 19% individual protection sales up 9% and higher fee income and asset management driven by higher AUM. Our AUM reached an all time high surpassing one five trillion dollars, reflecting both strong.
Speaker Change: Equity markets and the continued strength of our asset management capabilities.
Speaker Change: At 1.5 trillion dollars, we are Canada's largest manager based on asset manager based on AUM.
Speaker Change: Turning to slide five our success continues to be driven by our winning strategy, which is driven by our purpose of helping clients achieve lifetime financial security and live healthier lives.
Speaker Change: We continue to focus on positioning ourselves in high growth spaces and delivering for our clients as.
Speaker Change: As such we have sharpened our focus on our four strategic imperatives to include leverage our asset management capabilities and extend our wealth presence accelerate our momentum in Asia deepen our impact go longer client health journey.
Speaker Change: And operate like a digital company.
Speaker Change: Turning to slide six we share some of our key highlights and progress from this last quarter, starting with our focus on asset and wealth management, we realized solid earnings momentum stemming from higher fee income and MFS and SLC management.
Speaker Change: MFS delivered strong investment performance during the quarter and AUM returned to its highest level since Q1, 2022 while outflow challenges remain we are confident in the long term strategy of MFS and the actions, they're taking to address these headwinds, including offering a diverse range of investment products to meet evolving client needs.
Speaker Change: This quarter MFS achieved strong momentum in separate managed accounts, which year to date, we're up 40% relative to the same period last year.
Speaker Change: That's also experienced growth in fixed income and strong investment performance, which contributed to steady AUM growth.
Speaker Change: Finally, MSS will be launching five actively managed Etfs on December the fifth.
Speaker Change: And that's all fee management fee related earnings were up 6% year over year on higher AUM driven by strong capital raising this was absolutely seize highest capital raising quarter since Q1 'twenty 'twenty. One we also acquired the remaining 20% interest in infrared capital partners, our global infrastructure investment manager.
Speaker Change: Since our initial majority stake acquisition in 'twenty 'twenty infrared has broadened SLC management suite of alternative investment solutions, while also creating the opportunity for infrared access North American investors through our distribution networks.
Speaker Change: We're also delivering on our purpose of helping clients achieve lifetime financial security through offering innovative wealth solutions.
Speaker Change: In our Canadian group retirement services business, we are helping clients with their longevity needs and have watched my retirement income and innovative first for Canadians that offers retirees a reliable source of income while maintaining flexibility and the potential for continued investment growth.
Speaker Change: This fully automated solution will help ease the transition from saving during working years to drawing income in retirement.
Speaker Change: We also achieved record wealth earnings in Asia during the quarter, driven by solid performance in India, and our Hong Kong M. P F business.
Speaker Change: And we also realized strong protection results in Asia individual protection sales were up 19% year over year, driven by higher sales in Hong Kong, India and Indonesia.
Speaker Change: In Hong Kong, we observed growth across all channels, including all time High agency sales and strong contributions from our bancassurance partnership with tossing bank.
Speaker Change: In India, we continued to execute well across our distribution channels.
Speaker Change: We also continue to see strong sales momentum in Indonesia, where we are preparing to launch the next stage of our partnership with C. N V. Niagara on January the first shift.
Speaker Change: Shifting to help both Canada and the U S delivered strong group benefits earnings driven by improved morbidity experience and strong sales during the quarter.
Speaker Change: In dental we saw positive momentum in both Canada and the U S.
Speaker Change: Canada as the administrator of the Canadian Dental care plan, we continue to provide access to dental care for Canadians in need to date, we have enrolled $2 7 million Canadians onto the plan and process 2 million claims.
Speaker Change: In the U S. Our plan to improve dental results is proceeding well.
Speaker Change: <unk> renegotiations and claims and expense management actions are driving improved results.
Speaker Change: Membership is growing again and while there is more work ahead, we expect results to continue to improve towards the U S $100 million of earnings in 2025 that we discussed last quarter.
Speaker Change: Further this quarter, we reached a milestone becoming the largest dental benefits provider in the U S. With approximately 35 million members, we are well positioned in this attractive high growth market.
Speaker Change: Looking at digital Sun life was recognized this quarter as of 'twenty 'twenty Four CIO Award, Canada Winter for our Sun life as generative AI chatbot.
Speaker Change: And internal Gen AI chatbot that supports employees and delivering daily tasks more efficiently. Gen. AI is an important part of our digital transformation and we are committed to innovating and adopting emergency emerging technology in.
Speaker Change: In the Philippines, we implemented a new automated underwriting platform, resulting in a 50% increase in straight through processing. This platform not only enhances the client experience through faster turnaround times, but it also delivers operating efficiencies.
Speaker Change: We are implementing this automated underwriting platform across Asia.
Speaker Change: Finally, underpinning our strong business performance is our exceptional people and culture.
Speaker Change: This quarter Sun life was awarded the Canada order of excellence, recognizing our company as a leading employer that consistently prioritizes employee wellbeing buses a possible work culture and achieve excellence in mental health.
Speaker Change: We're one of two corporations in Canada to have received this honor special Thanks goes to Jock Sun Life, Canada as executive Chair, who has helped elevate our commitment to support the wellbeing of our people our clients and Canadians.
Speaker Change: I'd also like to welcome Jessica Tan, our President of Sun Life, Canada, Jessica has extensive global experience in insurance and digital innovation and is widely recognized for her thought leadership and execution across digital transformation and how she brings unique skills and capabilities to Sun life, and we are fortunate to benefit from her global experience.
Speaker Change: With that I'll turn the call over to Tim who will walk us through the third quarter financial results in more detail.
Tim: Thank you Kevin Good morning, everyone turning to slide eight we delivered record results in the third quarter with underlying net income of more than $1 billion up 9% year over year underlying earnings per share of $1 76 was up 11% year over year exceeding the high end of our medium term financial objective.
Speaker Change: Underlying return on equity of 17, 9% was in line with our medium term financial objective supported by strength across our diversified businesses.
Speaker Change: Wealth and asset management was 42% of Q3 underlying earnings up 4% over the prior year on higher fee income primarily from increased asset levels due to higher markets group.
Speaker Change: Group Health and protection businesses for 31% of underlying earnings up 21% year over year. These results reflect strong business growth in Canada, and the U S higher fee income in Canada, and improved group life mortality in the U S.
Speaker Change: Individual protection was 27% of underlying earnings up 3% year over year, driven by strong business growth in Asia, and Canada, partially offset by unfavorable mortality in Asia in the prior year.
Speaker Change: Company underlying results included adverse credit impacts of $43 million before tax and net of provision release, the net charge was less and 0.01% of assets and was isolated to a few names across several sectors.
Speaker Change: Reported net income for the quarter was 134 $8.332 billion above underlying net income the difference between underlying and reported net income was driven by an update to the estimated acquisition related liabilities in SLC management favorable net market related impacts and positive actuarial assumption updates.
Speaker Change: Favorable market related impacts were driven by positive net interest rate and equity market impacts real estate experience showed improvement this quarter as total returns were slightly positive, but below our long term expectations of seven 5% per year.
Speaker Change: We completed the annual review of our actuarial assumptions or Ecmo, which resulted in a modest 36 million benefit to net income and a 95 million dollar reduction in total C. S M.
Speaker Change: Our balance sheet and capital position remained very strong with a solar flight cat ratio of 152% up two percentage points from the prior quarter due to strong organic capital generation, partly offset by debt redemption and share buybacks organic capital generation of $693 million. This quarter was driven by underlying net income and new business C. S. M.
Speaker Change: Yeah.
Speaker Change: Holdco cash remains robust at $1 2 billion and our leverage ratio declined sequentially and remains low at 24%.
Speaker Change: New business CSM AV $383 million was up 4% over the prior year total CSM has now grown to $12 8 billion up 12% year over year, representing an increasing source of future profits.
Speaker Change: Finally book value per share increased 11% over the prior year and 6% quarter over quarter. This demonstrates our ability to generate strong growth, while returning value to our shareholders with 2 million shares repurchased this quarter under our share buyback program.
Speaker Change: Turning to our business group performance on slide 10.
Speaker Change: MFS is underlying net income of 218 million U S was up 5% year on year from higher average net assets reported net income of 210 million U S was down 1% year over year and the pre tax net operating margin of 45% was in line with the prior year.
Speaker Change: AUM of 645 billion U S was up 16% over the prior year and up 4% over the prior quarter driven by market growth, partially offset by net outflows.
Speaker Change: This quarter outflows of 14 billion U S included several large institutional mandate redemptions and retail outflows institutional outflows were largely due to portfolio rebalancing with retail outflows reflected continued preference in the current environment for high growth Tech stocks and shorter term interest bearing products.
Speaker Change: Overall MFS as long term investment performance remained strong with 97% of fund assets ranked in the top half of their respective Morningstar categories for 10 year performance.
Speaker Change: Fixed income performance was also strong with 98% of fund assets ranked in the top half of Morningstar on a 10 year basis.
Speaker Change: Turning to slide 11, SLC management generated underlying net income of $47 million down 11% year over year as higher fee related earnings were more than offset by a favorable both tax adjustments in the prior year, which did not repeat.
Speaker Change: Fee related earnings of $72 million were up 6% year on year on continued growth in fee, earning AUM driven by capital raising and deployment reported net income of $357 million includes the impact of a decrease in the estimated acquisition related liabilities from recent projections related to the future purchases of the remaining equity ownership.
Speaker Change: S O C affiliates.
Speaker Change: Since acquisition the net cumulative future liability has grown by over 300 million, reflecting continued earnings growth from our affiliate businesses.
Speaker Change: Capital raising of $7 1 billion was up $3 9 billion from the prior year, reflecting solid activity at SLC fixed income N V. G. O deployments of $4 6 billion were in line with the prior year as we saw continued opportunities in SLC fixed income and crescent, partly offset by slower deployment and B G O.
Speaker Change: And so six totally AUM of 230 billion was up $11 billion year over year.
Speaker Change: Turning to slide 12 candidate delivered solid results with underlying net income of $375 million up 11% year over year on higher fee income and strong insurance business growth, partially offset by credit experience.
Speaker Change: Reported net income of $382 million included net favorable market related impacts partially offset by unfavorable asthma.
Speaker Change: Wealth and asset management underlying earnings were down 13% year over year as higher fee related earnings were more than offset by negative credit experience Canada.
Speaker Change: Canada reported record wealth AUM of 185 billion, which was up 20% year on year on market appreciation and positive net flows.
Speaker Change: Group Health and protection underlying earnings were up 26% year over year on business growth in Sun life health and higher fee based income.
Speaker Change: Group sales were up 4% year over year due to higher health sales individual.
Speaker Change: Protection earnings were up 19% year over year, driven by business growth and higher investment contribution.
Speaker Change: Individual protection sales were down by 24% year over year due to lower participating policy sales through our third party broker channel.
Speaker Change: Turning to slide 13 semi for U S. Underlying net income was $161 million U S up 15% from the prior year. This was driven by strong business growth in employee benefits health and risk solutions and higher net investment results and I F N b.
Speaker Change: Ported net income of 250 million U S includes favorable asthma and net market related impacts and group health and protection earnings were up.
Speaker Change: By 13% year over year on strong business growth and group benefits and improved group life mortality experience, partially offset by lower dental results in.
Speaker Change: In dental we continue to observe the impact of Medicaid Redetermination and the resulting higher average acuity of remaining members, partially offset by pricing updates and claim and expense management actions.
Speaker Change: Q3 results also included a retroactive premium adjustment back to September one 2023, supporting our expectation that states will continue to reflect claims experience when repricing. These programs over time, we expect dental results to continue to improve as we've repriced the Medicaid book generate new sales and further execute on productivity initiatives.
Speaker Change: U S group health and protection sales of $219 million were up 22% year over year, driven by higher dental and employee benefit sales.
Speaker Change: Individual protection underlying earnings benefited from higher net investment results.
Speaker Change: Turning to slide 14, Asia underlying net income of $170 million was up 1% year on year on a constant currency basis as higher fee income and business growth were partly offset by mortality experience in the global minimum tax.
Speaker Change: Reported net income of $32 million includes unfavorable aqua and market related impacts we continue to see strong sales momentum in individual protection, particularly in Hong Kong and India is just strong sales drove new business CSM of $267 million up 11% over the prior year and total CSM in Asia increased by 12.
Speaker Change: The 2% year over year.
Speaker Change: Overall, we're very pleased with our results this quarter as we delivered on our medium term financial objectives, while maintaining a strong capital position our diversified businesses supported by our purpose driven culture continues to position Sun life for sustained superior growth.
Speaker Change: As a reminder, on Wednesday November 13th we're hosting an Investor day, where we will share further details and updates on our progress differentiated strategy and financial leadership, we look forward to seeing you then.
Speaker Change: With that I will now turn the call over to David for the Q&A portion of this call.
David Clark: Thank you Tim to help ensure that all our participants have an opportunity to ask questions. This morning, Please limit yourself to one or two questions and then requeue without with any additional questions I will now ask the operator to poll the participants.
David Clark: Okay.
David Clark: Certainly well now begin the question and answer session to join the question queue. You May Press Star then one on your telephone keypad, you'll hear a tone acknowledging your request if you're using a speakerphone. Please pick up your handset before pressing any keys to withdraw your question. Please press Star then two.
David Clark: Our first question is from John Aiken with Jefferies. Please go ahead.
John Aiken: Good morning in terms of the.
John Aiken: You mentioned the retroactive premiums on dental is there anything else in the pipeline that may be coming coming down towards you and the experience that you had in the quarter does that change how you expect the $100 million to be recognized through 2025.
David Clark: Thanks, John This is Dan Fishbein.
John Aiken: In terms of the retroactive premium that was for the past year. So a relatively recent period of time and it is clearly a reflection that the states understand that the premiums need to be adjusted to reflect the actual emerging experience in the wake of the dis enrollments.
John Aiken: After the public health emergency ended of course, a retroactive premium is quite an unusual event and we're not counting on those but there are other places in other instances where that could occur.
John Aiken: In addition to the retroactive premium we've obviously been focused on proactive premium adjustments and.
David Clark: And quite a bit of that has been completed and continues to be effective with each subsequent quarter. In fact, our two largest state contracts have their new prospective premiums effective nine one of this year and 10, one so we will obviously see a meaningful impact from that starting especially.
David Clark: In the fourth quarter at this point, our efforts are proceeding quite well our work with the states proceeding well as well as our own management actions. So we continue to believe that the 100 million for next year.
David Clark: It is quite possible is a very reasonable expectation for us.
Speaker Change: Thanks, and then just a point of clarification.
Speaker Change: The retroactive premiums are state based are there any states that you that might that haven't made that determination yet or have you basically received the retroactive premiums for last year on all the states to operate it.
Speaker Change: No generally that's a very unusual event, we do have some risk sharing arrangements with states that have been in place for many years, but as far as in you know in AD hoc retroactive premium adjustment, that's a quite unusual event.
Speaker Change: But as I said, there may be some other limited places where that could occur of course, most of the focus both by the states in the us as well as the health plans. We work on is on prospective premiums.
Speaker Change: Understood. Thanks, Ken I'll re queue.
David Clark: Yeah.
Speaker Change: The next question is from Thomas Mackinnon with BMO capital. Please go ahead.
Thomas Mackinnon: Yeah. Thanks. Good morning question, just with respect to credit seem to be a little bit elevated in the quarter.
Thomas Mackinnon: If you can elaborate on what was driving that I may have been a private loan in Canada.
Speaker Change: Maybe just talk a little bit about how that might be secured what that relates to kind of yields you've been getting on that.
David Clark: Apparently idiosyncratic or should we is it indicative of something else and then I have a follow up thanks.
David Clark: Thank you Tom it's Randy Brown.
David Clark: Let me, let me just start sort of high level, if I could for a minute I think when you look at credit performance you have to.
David Clark: I think over the longer term given the episodic nature of credit.
David Clark: So over the long term of our credit losses, which are a function of both impairments net upgrades and downgrades and U C L.
David Clark: It's been lower than estimated spilt into liabilities to this pattern you know over many years.
David Clark: As a result it in.
David Clark: And losses that are lower than our expected credit results and every now and then you get a credit loss spike so individual borrowers that run into trouble.
David Clark: So they tend to be very lumpy in any one credit impairment given the size of our book.
David Clark: Perceived outsized impact in the quarter, so with that said the.
Speaker Change: The impairment this quarter are limited to a few credits that had specific borrower challenges and yes, you're right to point out.
Speaker Change: That it was Canada more than other geographies in this case so.
Speaker Change: This unique challenges.
Speaker Change: You know are factored into the release, we do have a large fixed income portfolio for 140 billion and three.
Speaker Change: Over 3000 Muni credits.
Speaker Change: Very well diversified both by sector and geography.
Speaker Change: So within that you will see these periodic Ah.
David Clark: Periodic.
Losses. So yes. This one happened to be the bigger of the of the several where in the private fixed income book.
David Clark: Which we've talked about in the past again, a big book highly diversified.
David Clark: Covenants and collateral protection.
David Clark: Well, well rated and offers both diversification and incremental yield.
David Clark: Sector, that's performed quite well for us and in the context of that.
David Clark: This credit experiences is relatively benign.
David Clark: Okay.
Speaker Change: And maybe just as a follow up then.
Speaker Change: 152 light cat here that looks pretty good.
Speaker Change: We're generating capital certainly if you add back the dividend and it's over 100% of your underlying earnings.
David Clark: Your leverage is pretty low at 24%.
David Clark: You've accelerated some of the share buyback, but a high class problem here to have with this kind of capital position and are generating so much excess.
Speaker Change: Our organic capital.
Speaker Change: Any thoughts as to what to do with that you know investing in that business is buying back stock.
David Clark: And an increase.
David Clark: Maybe we would've thought it would've been higher than the bottom end there, but your medium term targets. So any any comments you can share with us there. Thanks.
David Clark: Tom It's Kevin and as you know the business is generating capital and cash on a on a strong basis and it's as we expect it to generate capital and cash and our priorities for deploying cash and capital remain largely as they have been for a long time first we look at funding organic growth and funding our dividend increases and as you know we target.
David Clark: A dividend in the 40% to 50% payout range based on underlying earnings and we think that that returns the right amount of of cash to shareholders in capital to shareholders and.
David Clark: Then we are our next focus line is M&A, where we can add.
David Clark: Either scale or capabilities to businesses that need that and as we've discussed before we have pricing discipline around that where we look at M&A that can support our medium term objectives and can help us with all three of our medium term objectives earnings growth ROE and also our cash flow and finally then.
David Clark: We win when we.
David Clark: Have capital and cash that's in excess of our organic growth needs, our dividend and our M&A needs as we look at our M&A pipeline, we return that cash back to our shareholders and we've been doing that through the buyback program. So our priorities haven't changed on that front and we continue to watch that we're in a really strong position and we will continue to deploy capital against all of those things.
Speaker Change: Okay. Thanks.
Speaker Change: The next question is from many Grumman with Scotiabank. Please go ahead.
Meny Grumman: Hi, Good morning question on expenses, you're targeting $200 million inefficiencies by 26 on the back book.
Meny Grumman: The restructuring you announced last quarter.
Meny Grumman: Just wondering how youre tracking the percentage achieved ends at the end of Q3.
Meny Grumman: Then how should we think about expenses for Q4.
Meny Grumman: Overall, specifically.
Meny Grumman: Okay.
Meny Grumman: Yeah.
Meny Grumman: My many thanks, it's Tim Deacon I would be happy to respond to that question. We were quite pleased with the progress that we've been making on our restructuring program that we announced last quarter. So this year, we're on track to deliver about 40% of the savings that we had targeted and then we're also on track for delivering.
Meny Grumman: The remaining savings through 2025, and then into 2026. So you can expect about 80% of the savings will be realized by the end of next year.
Meny Grumman: Most of the savings are going to come across all of our business lines and particularly in the U S and Canada in 2020 for those first two series that had earlier.
David Clark: Earlier impacts and opportunities and when you think about our overall expense.
David Clark: Fences. This program is really designed to help ensure we achieve the higher end of our EPS growth target. So this is really underpinning the results that you're seeing both this quarter and would expect going forward I would add that there is always some volatility in quarter to quarter expenses, mostly in the corporate segment.
David Clark: And other areas just from timing of initiatives and in the fourth quarter, we do updates to our overall incentive comp as an example, just based on how the total year end results reflects so you can get some volatility from quarter to quarter, but overall very pleased with the progress that we're making and the discipline that we're showing.
Speaker Change: Thanks, Tim I'm, just trying to better understand how much I'm.
Speaker Change: Sort of efficiencies should we expect for Q4, specifically are you able to tell us.
David Clark: You know how far we are along as of the end of Q3 in terms of gauging I guess I'm trying to figure out the cadence here is there a bigger.
David Clark: Bump inefficiencies.
David Clark: Exiting Q4 versus versus Q3, it's hard to tell looking at that.
David Clark: This disclosure it so you can appreciate.
Speaker Change: Sure. So the 40% that I referenced that is for a total of 2024, there was very limited impact last quarter, because we just announced it and we had some this quarter, but the rest of the bulk of that 40% will occur in the fourth quarter.
Speaker Change: Great. Thank you.
Speaker Change: The next question.
Speaker Change: She is from Gabriele <unk> with National Bank financial Please go ahead.
Speaker Change: Good morning, a couple of quick numbers questions and then someone else L. L C.
Gabriele: The retroactive premium thing he said, it's unusual how how big of a number was that and is this something you've already collected or are you just kind of accounting for it.
Speaker Change: Yeah. Thank you this is Dan.
David Clark: Yeah, we're not going to disclose the exact amount of each of premium.
David Clark: Contract, but it was meaningful in the quarter.
David Clark: And it is an adjustment to prior premiums.
David Clark: That we entered into as an accounting adjustment in the quarter. We I don't believe we've yet received the payment, but we have a contract Ah that indicates we will receive that payment okay.
Speaker Change: Stop loss experience just wanted to get a sense of how that has trended for you guys because I've seen the noticed a few of your peers have had some issues in.
Speaker Change: Probably were too aggressive in selling the product the past few years and I'm just wondering if you're relatively shielded from that trend.
Speaker Change: Yeah, I'll talk about our experience not so much competitors, but as we've talked about over the past few years. During COVID-19, there was significantly lower health care utilization, particularly on the kinds of claims that would impact stop loss.
Speaker Change: However that utilization, especially over the past year has been recovering back to pre COVID-19 norms.
Speaker Change: We understood that we understood that there was some uniqueness some aberration in the very low utilization of the eventually it would recover as indeed it has so our pricing has reflected an expectation of normalized utilization as opposed to aggressively pricing to reflect the temporary reduction in utilization.
Speaker Change: <unk>, we've always been a very conservative.
Speaker Change: Conservative Pricer.
Speaker Change: We work with high quality brokers, who appreciate that they appreciate the stability.
David Clark: And the expertise that we bring the great people that we bring to the table and the products and services.
David Clark: So while no one is compute completely immune from an underwriting cycle. Our history has been and continues to be a responsible approach to pricing and indeed, our pricing and our loss ratios remain our loss ratios remain at or below what we set in our pricing targets, so even though the law.
David Clark: Loss ratio has risen compared to the very very low levels. We were experiencing we are still achieving our targets and our margins. Okay. Great and then the ramp up on F. L. C. Here your underlying income.
Speaker Change: Annualize that youre at a 160 can you remind me what your target is a I don't have it written down anywhere and then the I guess the accounting gain there the a.
Speaker Change: 300 million plus gain related to lower payments to fill few minority owners, what should I take away from the when you struck these deals at a price that was in part contingent on future sales of your AUM growth at some.
Speaker Change: Some are maybe one I don't know are falling short so.
Speaker Change: I mean, it's good to get a gain but the growth isn't coming in as expected.
Speaker Change: Hi, Gabriel it's Steve Peacher, maybe I can take that and I can tag team on the accounting question with Tim.
Speaker Change: Thank you your first part of your question was on kind of the run rate earnings you an underlying other.
Speaker Change: Underlying net income this quarter was $47 million and I would I would say today, that's kind of in the range of what I would consider a run rate.
David Clark: The core of our business, which is management fees is pretty stable and has been on an upward trend because AUM has continued to grow but on any given quarter. There are some few things that can move around results. For example, we get catch up fees. If we have a fund closing those can move around quarter to quarter performance fees income there's some seasonality.
David Clark: So those those things that can vary kind of offset each other this quarter.
David Clark: You asked about our target the targets that we've got out there for from Investor Day, a number of years ago for 25 was 200 $235 million of underlying net income and we think we're trending toward that so.
David Clark: Hopefully that addresses your first question.
Speaker Change: It does.
Speaker Change: If you'd like I can take a cut at the the.
Speaker Change: The second part of the question and then can you can correct anything I say correctly.
David Clark: What I would say is that our lives we have to book a liability of course for our for what we owe on the put call payments and we've got three entities left with put with backend payments VGL Crescent, which are in early 'twenty six and then AGM, which is in early 'twenty eight and while those those very.
David Clark: Lee there those back end payments are basically structured in a similar manner and that is the amount we pay as a function of a formula and the formula is based on an agreed upon multiple multiplied by the.
David Clark: Earnings figure in the previous 212 month periods prior to the put call date.
David Clark: For example, in an AGM, which is in 28, we would take that earnings measure in 'twenty six 'twenty seven average it and then put an agreed upon multiple on that that gives us the enterprise value and we pay 49% of that because we'd be buying 49% of the equity so when we.
David Clark: As we try to estimate what that liability is going to be we have to predict okay and we do this on an ongoing basis predict two things the magnitude of those earnings but also the timing of those earnings because earnings that hit in that for example in the example, I gave the earnings hit in 'twenty six 'twenty seven would have an impact on the put call payment for you.
David Clark: Earnings that actually hit in 28.
David Clark: So it's not just magnitude it's also timing and if you look at the adjustment this quarter, it's really a function of of moving out and the timing of those expected earnings a bit as opposed to the magnitude.
Speaker Change: Thank god for transcripts, but.
Speaker Change: Is it something that we can conclude that you know you're saying the timing of pushback on profit, so something's trending behind schedule or expectations or is that not a logical conclusion.
Speaker Change: Well I think that you know if you think about for example, one of the impacts this quarter is that.
Speaker Change: Where one of our big most important strategies is.
Speaker Change: To move get our alternative strategy sold into the retail marketplace.
Speaker Change: If you read any research report that's a megatrend. We're just we're in the first inning of that.
Speaker Change: We were confident in our ability to do that because we've got a broad range of alternative strategies, we bought a M, which is a national wholesaling platform in the U S. We've got a partnership with Scotiabank in Canada, but we're at the very beginning of that so as we predict tried to predict years from now how will that flow and the earnings off that AUO and theres a lot of uncertainty around that so.
Speaker Change: As we start to gain experience, we're adjusting that but you can appreciate the difficulty in projecting exactly.
Speaker Change: Exactly when it's going to come in three and four five years from now.
Speaker Change: Alright, well, that's a very helpful. And then I will go over the transcript because you have a thorough response thanks.
Speaker Change: Gabe Gabe this is Tim I might just supplement to everything that Steve said just to summarize overall, but this is really timing related so the liability value that was updated that only goes to the then remaining purchase date. So any of the cash flows that come after that are all to the benefit of Sun life.
Speaker Change: Just to add we've written up these liabilities by over $600 million since the initial acquisition. So 300 on a net basis. After the end of Q3 and all of that was charges to income. So you can see the liability valuations really sensitive to the timing of these projected results, but overall that cumulative $300 million increase.
Speaker Change: Flex the positive growth in our AUM the fund raising and deployment that we've done since the initial acquisition of these businesses. So we're very confident in the long term value. It's just the timing of when the actual final payment a curse alright cool Oh, we can do.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The next question is from Alex Scott with Barclays. Please go ahead.
Alex Scott: Hey, good morning, Thanks for taking the question I had another one on stop loss for you.
Speaker Change: We heard appear.
David Clark: Today actually say that they were going to take 100%.
Alex Scott: Pricing action on one one renewals and I mean, it just seems like this is potentially setting up to be one of the hardest markets. We've seen in stop loss for a long long time.
David Clark: You all seem to be much more price adequate and where you sit today.
Speaker Change: How much of a growth opportunity could that be how how much would you be willing to lean into a business like this where pricing might look a lot better for you next year.
David Clark: But you know it is still a cyclical business I'm just trying to gauge your appetite.
David Clark: Yeah.
David Clark: Yeah. Thank you. This is Dan Great question, we tend not to lean into those are you know.
David Clark: Dips in the market no question that pricing is going to harden in the near future and some of our competitors. As you noted very likely have to do some significant pricing take significant pricing action to correct. Their books of business that will certainly make the market more favorable, especially for someone like us.
David Clark: Who is well priced at the moment and it doesn't have that issue. However, we don't typically discount our pricing our pricing is set to be appropriate for the business that we write and the targets that we have and the brokers that we work with understand that and generally appreciate that so while it may be somewhat.
David Clark: An opportunity as the market hardens.
David Clark: You shouldn't expect us to go and acquire market share.
Speaker Change: Got it okay.
Speaker Change: Maybe switching over to MFS I mean, you know.
Speaker Change: As I look through the results I mean, one of the places as it continues to stand out as just the outflows in institutional and I you know heard of the commentary on that from the call, but it was wondering.
Speaker Change: If you could just provide more color on like.
Speaker Change: What to expect from that over the next several quarters as we think through 2025 I mean.
Speaker Change: Will we see those outflows temporary down was it more.
Speaker Change: Temporary pressure from his specific mandates or is there ongoing pressure there.
Speaker Change: Yeah, Good morning, Alex It's Mike Roberge.
David Clark: Yes, I think the retail flows were very similar to what we've talked about Pryor and as Tim mentioned, the asset sitting in cash which as <unk>.
David Clark: Central banks begin to lower rates, we and our partners expect to get better retail net flows on the institutional side. The last couple of quarters have been impacted by a particular strategy that is underweight Max seven and we've seen clients.
David Clark: And they are both moving passive as well as active alternatives, we would expect that to moderate obviously, we don't know what the next couple of quarters look like you don't many times, you'll get them within the quarter, you get redemptions and you see them redeemed within quarters. So we would expect those to moderate and improve from here.
David Clark: And what I'd say is as we look into next year and you know I've got 10 Maloney here as well if he could mentioned talk about is we are seeing some momentum.
David Clark: Momentum in fixed income institutional as well as retail.
David Clark: Also as Kevin mentioned, the launch of active Etfs, So I'll, let Ted comment on some of the things we're working on as we move into next year sure. Good morning, just real quickly the.
David Clark: Where we have performance related flow pressure as Mike mentioned, it's actually a small number of strategies and this one's that compete.
David Clark: It's heavily Max haven't dominated benchmarks and wherever underway at them. So you know.
David Clark: Our view on that will be dependent on what happens to make seven as well as how we manage risk around it but taking a step back as Mike referenced we've got very diversified.
David Clark: <unk> across the full spectrum of public equity and fixed income where performance is measured in most time frames is actually stronger.
David Clark: Across the board, notably in fixed income, which is where we do see the most meaningful medium and long term growth opportunity. So we certainly are.
David Clark: Aware of the near term challenges both in terms of performance related challenges here as well as industry exogenous flow pressures, but we're confident in resolving those as well as all of the growth opportunities, we have and as Mike referenced.
David Clark: The launch of the Etfs and in a couple of weeks.
David Clark: We think as both offensive opportunity and in defense of opportunity and we're excited about being able to provide our clients with our investment solutions and whatever package works best for them and we think that as we continue to do that and deliver investment results across cycle. The flows will once again be positive in the future.
David Clark: Thank you.
David Clark: Yeah.
Speaker Change: The next question is from Doug Young with Desjardin capital markets. Please go ahead.
Doug Young: Hi, Good morning, Dan back to you just you know there's been I think expense pressures at the U S. Dental side of your business because of the lower I think it was talked about being the lower Medicaid membership but.
Doug Young: I think in the presentation package. You also say you are the largest U S central provider.
Speaker Change: With 35 million members. So I'm just trying to kind of square that you. Maybe you can talk about what I'm missing there and then to get to that 100 million next year.
Speaker Change: The U S underlying earnings like how much of that is being driven on the expense side and maybe you can kind of add ons just talking about how sales are going.
Speaker Change: With the dental business, both Medicaid and the commercial side.
Doug Young: Sure in terms of the expenses you know what you're looking at there is a.
Doug Young: Our year over year comparison and of course, we've had a lot of membership loss in the Medicaid business.
Doug Young: During that past year, it was about 19.5% starting members lapsed due to the Medicaid redetermination. So while we have cut expenses and driven more efficiencies that hasnt completely kept up with that loss of membership. However, the membership is stabilizing and actually with news.
David Clark: Starting to grow we continue to have a robust set of initiatives going on to drive more productivity.
David Clark: So we don't really anticipate expenses being a drag on the business and in fact an opportunity.
David Clark: To make it more efficient over time in terms of the improved earnings for next year, certainly our expense initiatives play a role, but it's not a major role the biggest impact of course comes from the pricing actions that are being taken in conjunction with the states with health plans and <unk>.
David Clark: The pricing to the right place another significant contributor our claim management actions. These are things around utilization management claim at ads and other management actions that we can take and that's certainly a contributing factor I would say the expense actions are the third.
David Clark: Most important as opposed to a leading component.
David Clark: As far as sales sales continued to be robust as you know in the government market. There are few and far between but very large so sales can be lumpy, but for example in the quarter. We had our first wins ever in California, which is the largest Medicaid.
David Clark: Market in the country.
David Clark: We won three Medicaid contracts that are expected to be effective July of 2025 in California is a great opportunity for us in the future for significant further growth. There's also a significant pipeline of other Medicaid opportunities, we continue to see Medicare advantage as a substantial growth.
David Clark: <unk> opportunity and that growth is certainly underway and then quite a bit of opportunity in commercial our sales are up over 40% in the quarter year over year in commercial and we continue to see that as a very significant part of our growth trajectory in the future.
Speaker Change: And then just a follow up how much of the pricing repricing has gone through is it 50 60 any 90%.
Speaker Change: So what's happened so far and we weight. Despite premium and this is of course is specific to the Medicaid business is on a weighted basis, 91% of the contracts have been repriced as of October 1st now some of those contracts repriced quite a long time.
Speaker Change: <unk> ago, and that was before the full impact of the experience was had fully emerged so we've looked at that and said okay. If we had gotten the pricing on these contracts that we needed through pricing alone to bring.
David Clark: The loss ratios back to target levels, what would we have needed and what has been achieved and on a weighted basis that number is 61%. So as of October 161% of what would have been needed to have full our margins in the business.
David Clark: Has been achieved and is now.
David Clark: Going forward in the result, so of course, the obvious question would be what have how do you get the other 39% and clearly these contracts will need to go through a second round in some cases of pricing action. The good news is virtually all of them are annual contracts in terms of the pricing.
David Clark: So even you know this fall and certainly into next year, there will be additional actions that will occur to bring the pricing to full levels, but to your first question. We're also not waiting for the pricing to do all the work our management actions both claim and expense are playing a role.
David Clark:
David Clark: To close that gap as well.
Kevin Strain: Doug and Dan It's Kevin I wanted to add just one quick thing as a reminder, if you look at the quarter third quarter is a high quarter from claims experience because there's some seasonality to dental and I think it's important that we keep that in front of us and Dan mentioned that two of the bigger contracts were nine one in 10, one right. So if you're looking specifically at the <unk>.
David Clark: <unk> you need to keep those two things in mind I just wanted to add that just so that everybody had that perspective.
Speaker Change: Okay, and then just I.
Speaker Change: I appreciate that Kevin.
Speaker Change: Question, just imagine in Asia, I think expenses have been running a little bit high over the last little little why can't you can't talk about where you're investing.
Speaker Change: What and maybe just what I'm trying to understand is to get the momentum in Asia, and maybe drive that underlying ROE towards I think the target is loosely.
Speaker Change: Loosely stated that 15% plus but correct me if I'm wrong, but what has to happen to kind of start to get the bottom line underlying earnings momentum.
Speaker Change: Good morning, Doug So we have been making investments in Asia for the last little while.
Speaker Change: Really investing across the board in our brand and talent and technology and digital and you are in fact seeing the results in our in our bottom line already.
David Clark: Year to date earnings are up 15% year over year as Tim said, our sales were up 17% on the protection side, and we had a record quarter on the wealth side. So you are seeing the impacts of those those investments and our results today Doug.
Doug Young: And what about the ROE any comment on that.
David Clark: Well. They are we will take time right because you have a big denominator, so youre not going to move that on a quarter over quarter basis and in fact, you have seen.
Speaker Change: And the ROE.
Speaker Change: A few years ago. It was at 10% and now we're kind of trending in the 12% to 13% and we expect to see further progress as we move ahead.
Speaker Change: Thank you.
Speaker Change: The next question is from Mario Mendonca with TD. Colin. Please go ahead. Good morning first question, Ken If you could just help me understand one thing on this retroactive premium I appreciate you're not going to get into that the size, but was it recorded an experienced gains is that the right place and driver of earnings look for it.
Speaker Change: I may need to ask for help from Tim on that one I think the answer is yes.
David Clark: Hi, Mario its Tim Yeah, that's where it will show up okay. So the delta there like it went from a loss of $17 million last quarter to a gain of $8 million.
Speaker Change: Can we use that as a gauge of how the <unk>.
Speaker Change: Size of the of the restaurants are premium.
Speaker Change: But who knows.
Speaker Change: Seasonality.
Mario: Oh, Yeah, sorry, yeah, well, Tim Yes, I would say, there's three things in there that we need to look at one is the seasonality. So Q3 is the worst quarter for seasonality in the dental Medicaid business and for.
David Clark: A pretty obvious but interesting reason, it's right before school starts so parents take their kids to the dentist before school starts.
David Clark: Then Conversely, Q4 is the best quarter for seasonality at school has begun its before the holidays.
David Clark: So thats actually a currently a tailwind for us but the seasonality is one factor a second factor is we had progress on the rate increases and the claim action. So there was some underlying improvement in the loss ratio. If you normalized for both seasonality and that payment and then the third item was the payment. So it's the.
David Clark: A combination of those three it's not isolated to one thing right. So there's no real way to tell if that's good enough. Let me move on to a different type of question on MFS for as long as I've been paying attention to this company. It's one of those unique asset managers that does not grow through acquisitions.
Speaker Change: And like in the current environment would you be more open to.
Speaker Change: To M&A within MFS to pick up capabilities distribution people that might.
Speaker Change: Yet you had a positive flow center is that is that something you'd consider or is that still completely off the table.
Speaker Change: Hey, good morning Marvin.
Speaker Change: Mike I was going to start off Mike and I'll, let you, let you build on it but I know we're on the same the same path on this one you know if you look at acquisitions in the active asset management space, they're they're they're tough to do and they often don't result in and the growth that you would expect and we have a lot of confidence in MFS as capabilities I talk.
Speaker Change: About them building out on the fixed income side, we talked about the active etfs coming out in the DC space and we've talked in the past that they know how to run assets and their clients understand what theyre doing so.
David Clark: It's an area that.
David Clark: I look at it and I'm really pleased with what we get from MFS in terms of our overall earnings performance. The addition, it does to our ROE and the cash flow as you know, we get 90% of their earnings back as as cash. So I think those are all important factors and if you step back and look at MFS.
David Clark: Part of our broader asset management platform that includes SLC, our wealth management pieces that are an important flow into both MFS and SLC and then what we're doing in Asia. So you know it it's.
David Clark: Now Mike I'll, let you add to that but I think that I think you and I are quite aligned.
Speaker Change: Yes, good morning Mario.
Mike: As Ted mentioned, we still see plenty of opportunity for us to grow whether that be adding active etfs to existing capabilities.
Mike: For retail investors in the U S.
Mike: Significant opportunity for US you know, 80% of our assets are in equity strategies institutionally.
David Clark: And the vast majority of the wallet for most institutional clients is fixed income and parts of the world. So we see enormous opportunity for us to scale up that business. The second thing I would say is you can take it from a financial modeling lens and you can make acquisitions makes sense on paper. The reality of it is if you take it from the client lens clients turn to <unk>.
David Clark: Not like.
David Clark: Their asset manager doing that because it takes focus on managing the asset on behalf of the clients.
Mike: Other than <unk> and on integrating two disparate cultures and businesses and so we've historically seen where some of these happened that we're the beneficiary of assets because clients move their assets to someone else, who is more stable and focusing on running their business their assets for them.
Speaker Change: So I would reinforce Kevin's point, we see growth opportunities in many other places and we don't need to think that we have to take the risk to do it and we're better off focusing on existing clients, that's finance or the final thing on Roe.
David Clark: Let your peer I can think of four or five reasons why somebody zoro. It can be higher I can think of four or five reasons why it might be lower and I cannot figure out, which ledger, which side of ledger wins. So maybe the question for Kevin for Tim How do you balance those two things. It does is this a company that can.
David Clark: Punch up to like a 19% ROE overtime or is 18 sufficiently give me that.
David Clark: Good enough.
David Clark: No Mario if you look at it it's Kevin if you look at it our ROE is driven by the mix of our business and the performance of our businesses and if you step back and do the math. So that's that's where we come out and I think where we like the mix of our businesses and the resiliency you've seen it coming through Covid, you've seen it through a bunch of different sort of.
David Clark: Factors so.
David Clark: We'll talk more a little bit next week on Investor day about specific things around the businesses and driving those but you know the the math of it is that the mix of business the asset management business should add row, we see Asia growing ROE over time, the U S. As dense request comes back into earnings will grow or we can.
David Clark: Is doing a fantastic job on.
David Clark: So we like we like the mix of our businesses, we like the resiliency of you and it does it gives you a strong <unk> result.
Speaker Change: Oh, great. Thank you.
Speaker Change: The next question is from Paul Holden with CIBC. Please go ahead.
Paul Holden: Alright, thanks for making time for my questions. So first one is going back to Asia.
Paul Holden: Negative insurance experience in the quarter I believe you pointed to mortality at the same time, we see a pause of Akamai update on mortality in Asia. So maybe talk to what happened in the quarter or if it's indicative of trend or not thank you.
Speaker Change: Good morning, Paul mentioned, so I'll talk to the first question that Kevin handle the asked my question. So in the quarter the mortality largely related to our international high net worth business that business does see mortality from time to time, it's just the nature of the business.
Speaker Change: Yeah.
Speaker Change: And Paul Thanks.
David Clark: Thanks for the question on the atmosphere for Asia, We did see a positive.
David Clark: Biggest source of that positive in the quarter, we called those related to the Hong Kong refinements. So you can think of these errors can buy fresh 17 post implementation clean up. So we did the review going back to the implementation of <unk> 17 to review is completed now resulted in a number of one time gains both in.
David Clark: Net income in CSM.
Speaker Change: Thank you and then second question is with respect to organic capital generation. A number you kind of just started reporting recently in our quarterly slide deck, which we do appreciate but in each of the last two quarters, it's been significantly higher relative to earnings and that sort of 20% to 30% guidance you've given.
Speaker Change: In the past is there something unique to the last two quarters on why that's the case or perhaps maybe that 20% to 30% guidance number needs to be revisited.
David Clark: Hi, Paul its Tim So you're right. This is a new metric for us and and you're right to point out that our organic generation has really been strong in the last couple of quarters.
David Clark: And it's been above target really driven by the strong profitable sales that we've been seeing in Canada in Asia are quite consistently.
David Clark: And.
David Clark: We're still targeting on a longer term basis, 25% to 35% of the unique because this is after paying our dividends. So that gives us flexibility on the dividend payment and where we are in that dividend yield.
David Clark: As well as other capital deployment that we would seek to make opportunistically. So you're right. It is elevated and that's a good thing because it's shown that we've had strong sales and it shows the earnings power in a conversion to cash ultimately if the organic capital generation contributes but over the medium and long term, we think that 25% to 35.
David Clark: A reasonable guidance range.
Speaker Change: Okay. That's it for me thank you.
Speaker Change: Yeah.
Speaker Change: Yeah.
Speaker Change: The next question is from La <unk> with <unk> Securities. Please go ahead.
Speaker Change: Yeah. Thanks.
Speaker Change: I know you guys don't want to share the number of this retroactive premium, but just to be clear here.
Speaker Change: U S $90 million and underlying dental earnings in Q3.
David Clark: Is that.
David Clark: In terms of like are all the benefits recorded this quarter are there benefits to underlying earnings in future quarters related to this.
Speaker Change: Well the benefit of the retroactive adjustment itself was in the quarter, but that same state has.
David Clark: <unk> done two other things one is the premium increase going forward.
David Clark: And they are also committed to re looking at the adequacy of premium.
David Clark: In the second quarter of next year. So it's a state that's being a very good partner, making sure that the premiums matched the risk that we're taking on for them.
Speaker Change: Martha Kevin I, just wanted to reiterate that next year. Our goal our target is $100 million USD and you can think about it that is 25 per quarter. If you divide it by four and plus or minus that based on some seasonality and repricing, but that if youre looking where to.
Speaker Change: Put your marker down I would put it down around there.
Speaker Change: Okay.
Speaker Change: Gotcha, and then just coming back to it's a micro version then maybe Tim on the MSS, but thinking about the.
Speaker Change: The evolution of earnings at MFS are there actions that you guys are taking to potentially boost the earnings power of MFS, perhaps related to the restructuring charges.
Speaker Change: And last quarter, and then secondly, maybe on the following the commentary of the introduction of some of these active ETF products, how does that impact the margin profile of ASUR MFS looking for it.
Speaker Change: Hi, This is Mike I'll take the margin question in the prior question I know, Tim if you want to take that.
Speaker Change: From a margin perspective, both with active Etfs as well as fixed income with active Etfs.
Speaker Change: Management fees that are similar similar to existing vehicles. So there is no impact on our profitability.
Speaker Change: As it pertains to fixed income while the fee rates are lower on fixed income the majority of the costs, which would be investment costs and the platform that we've built out our already embedded in the business and so frankly, even though asset base.
Speaker Change: The basis points earned on assets will go down and we actually think profitability is pretty similar and will not have an impact on our profitability as we scale that business.
Speaker Change: And then the mandate side tends to be relatively large.
Speaker Change: So both of those things, we do not believe 11 impact on our margins.
Speaker Change: Cool.
Speaker Change: Yeah, Mike I think you covered that well I don't know if theres anything further on that.
Speaker Change: Not on that but maybe you could talk about any actions like maybe on the expense side at MFS relate to the restructuring charges like anything that you can do there to.
Speaker Change: Kind of boost the earnings power of MFS.
Speaker Change: So I think Mike touched on the key areas of growth.
Speaker Change: The biggest assumption or impact on the earnings is the markets at over 640 billion of AUM. That's the most material sensitivity so as markets continue.
Speaker Change: Continue to recover that that will flow through.
Speaker Change: The expense base at MFS is highly variable over 70% of the expense piece varies with the a M and the fees. So there's good operating leverage in that in that 40 over 40% operating merger that's top tier for any public asset manager globally, and so I'm quite proud of that the track record that MFS has had on that.
Speaker Change: And they werent directly part of the formal restructuring program that we announced last quarter.
Speaker Change: They prudently managed our expenses from time to time, so it wasn't necessary that that program address in the past.
Speaker Change: Uh huh.
Speaker Change: They are cyclical.
Speaker Change: The next question is from Darko <unk> with RBC capital markets. Please go ahead.
Darko: Hi, Thank you. Good morning, Thanks for squeezing me in and I'll be very quick on this because I also had questions on the margin in MFS and I guess my question boils down to the following.
Darko: I hear you that 70% is variable in terms of cost and 40% is top tier. So is that to say that if we took the AUM here assumed you sort of get past or challenges in flows of markets still behave very well and you double the assets under.
Speaker Change: You called that you take this thing to five trillion or are we still to model. This thing.
Speaker Change: With this sort of very recognizable pattern on operating margin and it doesn't really improve from here I guess it feels as though it's designed and constructed and you can look historically at the <unk>.
Speaker Change: The average AUM and it's a very tight range of where your margin balances is that the way to think of this if we take this thing double triple quadruple in size at the margins always going to sort of sit here at around these levels.
Speaker Change: Darko, it's Kevin we're not we're not modeling double triple quadruple inside Emerson.
Speaker Change: So I think we're ready to look at it yeah, yeah, well, it's I'm not sure. It's a perfectly aligned theoretical number right. If you look at it we're expecting MFS to roughly grow with the market and you know they've got some puts and takes in some of the businesses, but they'll roughly behave as Tim said, along with what the market performance.
Speaker Change: Yes.
Speaker Change: From an earnings perspective, okay. So so there isn't really much hope for a significant improvement in the margin.
Speaker Change: They're already at the industry, leading margin levels right and they do a good job of managing that and managing their business of managing their expenses and as Tim said their expenses are largely variable. So I think that's the way to think about it.
Speaker Change: Thanks very much.
Speaker Change: The next question is from Thomas Mackinnon with BMO capital. Please go ahead.
Thomas Mackinnon: Yeah, Thanks for taking the follow up.
Thomas Mackinnon: On other fee income in Canada.
Thomas Mackinnon: Just like over the last couple of quarters, it's moved up nicely just even a.
Speaker Change: Quarter over quarter, and I assume that maybe correct me if I'm wrong.
Speaker Change: This has to do.
Speaker Change: Some extent with.
Speaker Change: A S O fees, perhaps is that some of those in there maybe you can help me in.
Speaker Change: With respect to that or what's in that number and what's driving it to be moving up nicely. Thanks.
Speaker Change: Yes, Tom this is John.
Speaker Change: There are different components obviously.
Speaker Change: The increase in the market.
Speaker Change: The wealth business.
Speaker Change: Increases in fee income.
Speaker Change: There is also as you just said so in the health business.
Speaker Change: And see DCP is also part of that this quarter.
Speaker Change: Oh, that's what you're seeing in there.
Speaker Change: Okay. So that's what we've seen ratchet up nicely just of late is landing them that Canadian dental account is that correct, that's definitely helping as well as the market this quarter yeah.
Speaker Change: Yep.
Speaker Change: Okay. Thanks, so much.
Speaker Change: We have no further questions at this time I will turn things back over to Mr. Garg.
Speaker Change: 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 great day.
Speaker Change: Okay.
Speaker Change: This brings to an end today's conference call. You may disconnect. Your lines. Thank you for participating and have a pleasant day.