Okay, the music's off, so that's cue. Good morning, everyone, and welcome to the second day of the Scotiabank Financial Summit. We have a packed agenda for you this morning, so I think we'll just get right into it. It's my pleasure to call up to the stage Kevin Strain, President and CEO of Sun Life.
Thanks, Meny.
Good to see you, Kevin.
Thank you.
Thanks for being here.
Thank you. Thanks.
Get comfy.
It's great to be back in September and back at it. So we were just talking about that, it's last week was vacation time, and now we're here.
We're here.
We always know it's the start of the fall when we're at Scotia, so-
It's a signal.
It's a signal.
That's the-
It's definitely a signal.
TIFF and this event.
Yeah.
So thanks for sitting down with me once again. I want to start off by just getting your thoughts more broadly on your results. Q1, a rare miss for you, but Q2, redemption, a pretty sizable beat. Adjusted ROE back above 18%, which is your medium-term target. So really, the first question is what should investors take away from the Q2, or maybe even the combination of Q1 and Q2, and how sustainable is Q2 now?
Q2 was definitely a nice bounce back for us, and more where we would expect our earnings to be and how we'd expect our earnings to look. If you looked across the business, a real strength in Canada. We saw Canada grow, I think it was 8%, and a real strength in Canada that reflects our position here and also the Canadian market. Asia had a very good quarter, and Manjit off to an amazing start in Asia, and he's driving things. In particular, we saw Hong Kong and our international business do well. I think if you looked at us compared to our competitors, we're happy with the performance in Asia.
The U.S., outside of our dental business, and I know we'll talk more about our dental business, had a strong quarter. Lots going on in there, but overall, a strong quarter. And even MFS was up 4% over last year. If you looked at the DOE, the drivers of earnings, and the quality of the drivers of earnings in the quarter, you had actually a small negative in insurance experience overall on a after-tax basis, small positive on a pre-tax basis. A small credit negative, but a small investment others positive. So if you looked at the sum of the DOE, credit and investment other, it's relatively unimpactful, so you'd say a very high-quality earnings quarter. So I like that as well, and I...
So again, I think that's why we say this is more in line with what our expectations would've been, not the first quarter. The second thing, we saw this in both first quarter and second quarter, but even more so pronounced in second quarter. We had CAD 437 million of CSM, new business CSM. That's future earnings that are gonna come through. That's CAD 150 million plus more than it was same quarter last year. You think about that, that's earnings that are gonna come through in the future. Under IFRS 4, that would've been earnings that some of that would've come through in the quarter. We had CAD 1 billion. We put an additional growth of CAD 150 million in CSM, CAD 430 plus million in CSM.
So overall, I was really pleased with the quality of the quarter. We weren't pleased with Q1, and I think you said, as you say, it was a rare miss. There was a bunch of things that went negative in the quarter, but we're back to where we would expect to be. And I think the quality of that and the diversity, the resiliency across the four pillars, and then just the quality of the insurance earnings, to me, puts that in the area of our sort of expected, where we would expect to be from an earnings perspective.
Definitely, I would agree with that in terms of the resiliency. But I do wanna dig into, you know, some of the areas that you mentioned, dental specifically-
Yeah
... which has been a challenge. We learned sort of a new term over the last little while, Medicaid redetermination.
Yeah.
I don't think anyone had heard that term before, but that's definitely weighing on performance in your U.S. dental business. It's driven by COVID. But, you know, you've talked about it in the past, but maybe for the generalists in the room, if you could just kind of explain the dynamics here. What, what's really going on?
Yeah. At first, we really still like this acquisition on a long-term basis. It provides scale to our U.S. business, and it opens up opportunities across the board in dental, including commercial, and we have some more growth that we can see there. But the Medicaid, Medicare space is a very big space in the U.S. You can imagine that there's close to 100 million Americans that are on Medicaid or Medicare. It's a massive business. It requires scale. Because of the way the government prices these things, if you don't have scale, you're not gonna be profitable. We have scale through DentaQuest. We're the largest dental provider. We knew when we did the acquisition, in, I guess it was 2020, that the public health emergency was going to end.
We didn't know when it was going to end, and COVID and the Public Health Emergency, specifically in the U.S., went much longer than we would've expected. So what you saw was more people on Medicaid, and they weren't allowed to exit. So even if they had a job or other coverage, they weren't allowed to exit. That became over the time, close to 17% of that book went through the redetermination process, so they fell off of Medicaid. The group that was falling off was using it less for the reasons we I was just saying, right? Because they maybe had coverage in different places. So what we weren't expecting was it would go so long, the percentage that would fall off would end up being that much.
And we benefited from that for the first three years, but would end up being that much. And if you look at what happened then is the claims ratio went up. About half of the increase in the claims ratio was from these folks exiting. And then what happened with about the other half is that the cost for those people staying went up. And for a variety of reasons, dentists ended up having free space, and so they were using it more. Dentists were maybe making less income, so they were looking for more expensive procedures to do, and then people were also using it more. You can imagine if you saw that 17% of the people exited and you've got this insurance benefit, they were using it.
So we're seeing about half come that way, and half come from the people leaving and about half from higher price from those that were staying. The way that Medicaid, Medicare works in the U.S. is that each state prices this based on reviews and actuarial reviews, and they price it at a way that if you have scale, you're gonna make a competitive profit. We're now going through the negotiations. We've talked about that, and we think that we can. We're starting to see pricing come in more in line with what our expectations would be for the types of claims experienced. In fact, we're actually negotiating with a few of the larger states, and have discussions with them, special payments related to the losses we would've had in the first quarter.
And this isn't related specifically to us. This is being done by the industry, because they want the industry overall to provide good service to the Medicaid members. These are voters, and these are their citizens. So, you know, overall, it's been a rough ride the past few quarters. We've put out a target of CAD 100 million next year. We feel pretty good about that target still. And you know, it'll come back. I think that this provides us a unique asset. I've been told by many US CEOs at different times, they wish they had bought the DentaQuest business. You know, it gives us scale in the U.S., it gives us additional capabilities, it gives us a new market space, but for sure, it's been a tough few quarters.
I think it's important to highlight. I don't know if you wanna add to this, but I mean, this is not just a Sun Life issue, right? This is-
It's an industry issue. Absolutely, an industry issue, and that's why those special payments, if they come about, will be for the industry, right? Reflecting... 'Cause the states fundamentally can't afford to have providers that lose money. They won't have any providers.
So this is very much a temporary issue in terms of what you're describing?
About CAD 100 million next year after tax. That's the goal.
Another aspect of your U.S. business, the stop-loss business, is also an area that I wanted to talk about. Definitely, COVID has impacted that business as well, in terms of utilization rates. So maybe you could give us a little bit of a sense of kind of the journey that that business has been on as a result of COVID and where we are now.
Yeah, yeah. I mean, the COVID, as this group probably knows, the COVID impacts were different in the U.S. than they were in Canada, for a variety of reasons. And through COVID, we saw much higher mortality in our group life and health business, and we saw better morbidity experience in our stop-loss business. And as COVID's now sort of coming to an end, we're seeing some of those things normalize. So mortality's been coming down, so the core group benefits business actually doing very well. And we've invested a lot into digital and to service models there, and that business is doing really well. The stop-loss business, we're a leader, and we're actually still...
While that experience is coming back, it's still above our pricing target, and we're still one of the few that are sort of living in that positive space in the stop-loss business. So it's less good than it was, but it's still overall good. We've got this target of over 7% for the group benefits business, and on the combined, we're still doing better than that, rolling four quarters. You know, I think if you look at the stop-loss business, we're one of the largest players, we have more data than others. We are not known as being aggressive pricers, and partially, we've been adding new capabilities so that the discussion isn't just about pricing. We added a business called PinnacleCare, which helps...
If you have a claim, it helps the person manage the claims experience, find the right treatment and effective cost. So we're trying to change the dialogue there as well. You noted the industry. The industry was more aggressive on pricing in the stop-loss, partially because the morbidity had been lower, and a few of them are feeling the impacts of that, so we expect pricing to sort of again normalize. But we haven't been disappointed at all with our own pricing in that business. It's just that the profit margins have been coming more back towards sort of our longer term expectation.
Just remind us in terms of the repricing cycle of that business. Like, it reprices-
It's annual.
It's annual.
Yeah. Yeah. So I, you know, if I look at the U.S. business, outside of DentaQuest, it's performing really well, and Dan's been there for more than 10 years now. I think it's the business is doing well. We're investing in digital, we're investing in scale, we're seeing the benefits of those investments, and we will work our way through the DentaQuest issues. And structurally, the way Medicare and Medicaid is set up is to work through that, and then we'll continue to build on our commercial business there as well.
The integration's gone extremely well. When I go down there and talk to the folks from DentaQuest, they're really happy to be part of Sun Life. We've kept the people we want to keep, and the business is making some large new sales as well, so I mean, I think this has been a difficult period, but we'll come out of that, and we'll see that business start to grow again.
It's a capital-light business, right?
It's a capital-light business. It's annually repriceable. You know, it's you know, we're pretty well-tuned for a low interest rate environment. As interest rates come down again, we're in really good shape there.
... wanted to switch gears, talk about MFS and SLC.
Yeah.
You know, we're seeing pretty consistent outflows, you know, for over a decade now. Question is, you know, what changes that trend? I think we've been asking that question for a while, but I'm curious your perspective on that. Then just how important are positive flows in that business, especially when it relates to your financial targets? Like, does it really matter to be in net flows? Is that a priority for you or is it not?
If you step back and you look at our asset management platform, we're close to one point five trillion in assets under management. MFS is a huge part of that, and that's our public equities and public fixed income globally, both retail and institutional. We think that's an important space if you're in the asset management business. We think MFS does a pretty good job on how they do their investments. But the continuum of asset management goes far beyond just MFS into alternatives. We've built out with Crescent on the high yield. We took our private fixed income capabilities to the market, BGO with real estate, and InfraRed on the infrastructure. We have a complete suite of alternatives, which we think is important.
We have a good asset management platform in Asia. We're a number six asset management company in India. That company is a public company, and we've done quite well out of that going public. We still own 30% of that. We have a big asset management, sort of fund-of- fund business in Hong Kong, and we're the second largest asset management business in the Philippines. So we have a full continuum as part of that CAD 1.5 trillion, and that's not even including our GRS business and those types of things. MFS is an important asset to us. We've owned it since the early 1980s. It's made over CAD 500 million in the first half of this year. They pay 90% of the income back to us in dividend and cash flow.
It's a huge provider of cash flow. Earnings on the quarter are up 4%. The flows, of course, are something we watch closely, but if you think about switch to passive over the past 10 years, switch to alts, which is why we built out alternatives, and how they do their investment management, they're capped on the Magnificent Seven on most of their funds. They're doing the right things, they're building out active ETFs, they're building out their public fixed income capabilities. Their public fixed income performance has been really good. Their clients are driving them towards active ETFs. Overall, I think MFS is still a really good asset for us. It's a really important piece of our asset management platform. It is in the cycle of harder for public equities, public fixed income.
You've heard Mike talk about $6 trillion on the sidelines. I think they're. My perspective of MFS is, they're doing the right things. They have really good investments people. Their clients understand how they're investing. The performance they've had is in line with how you would expect that sort of firm to have. Their clients understand that. It is a bit of where they're at in the cycle. I think they're doing the right things, building out active ETFs and on the public fixed income side. So, you know, it's the beauty of us is we're thinking long term, and we're not gonna force them to do things that are bad for the business, and they've got a good management team.
So, you know, MFS is an important part of our asset management platform, important part of that 1.5 trillion, important part of our earnings and cash flow, up 4%. So I'm still a big believer in MFS, and I think the importance of public markets. You know, I've heard and we're in the alts as well, and I think the alts are important. You know, you can listen to some of the CEOs of some of the alts companies, they would tell you public markets aren't important. I don't believe that. I think public markets still have a pretty important role, and I think we're-
We're happy to hear that, Mr.
Yeah, I know. So, you know, I... You know, it's what I see from MFS is some of what I would expect to see in the current environment.
Wanted to talk about SLC. I think it's-
Yeah
... pretty remarkable what you've been able to build.
Yeah.
We saw net outflows this past quarter. I was hoping you could help us understand that. I mean, I don't think interest in alts is waning in any way. I don't think so, but-
No. And, you know, it's if you look at our alternative platform, real estate is a key piece of that. BGO is the largest business. Long term, we really believe in real estate, but that's gone through a cycle that's been a bit more challenging. Those flows will go a little bit up and down. I think long term, we still expect, even long- even medium term, short term, flows will start to come back. Interest rates are... You know, there's some indication they're gonna come down a little. That should actually be overall good for the alts business. Our investment performance has been really good. There is a focus right now in getting ready for the buy-ups in BGO and in Crescent. We just completed our InfraRed buy-up, so that's done.
But the team is really getting ready for that. You heard we talked about announcing Sonny Kalsi and Chris Wright and Jack Paris as the leadership piece. You guys all know this, right? The most important aspects in the investments world is who's leading the companies and who's leading the investments teams, and we've been able to solidify that. So you know, I think that solidification of that, and you're gonna see these folks at our investor day in November. I think the solidification of that is gonna be good for that business. So we're really bullish on the capabilities we've built there, and that space is still gonna be really important. Of course, through our general account, we're a good partner to those alternatives fund manager. Also a good partner to MFS, by the way, so they're also a feature on our platform.
You mentioned the Investor Day. I wanna get a little sneak peek, but before that, continuing on SLC, just wanted to take the opportunity to ask about Advisors Asset Management.
Yeah.
You did that acquisition. It's already a while since you bought that distribution platform. I'm curious how that's working out and sort of if you could just talk a little bit about sort of-
Yeah
... the execution of the acquisition of the distribution strategy in the US, how that's going?
First, we see a significant opportunity, particularly in the high net worth space, for retail versions of the alternative funds, and some of our competitors are getting good traction there. We bought AAM because of their relationship to wirehouses, and we've now launched our first fund, which is one of the Crescent's high yield credit funds into that channel. We've had to build wholesalers there that were familiar with the alts. So that's now launched. At the same time, we launched a partnership with Scotia.
We're pretty proud of that, and our first fund has launched with Scotia as well, and we think long-term, that has potential. We're eyeing the opportunities in Asia. So AAM is building those capabilities. It takes a while to build the relationship and to show the track record of the retail funds into that category, into the wirehouses in the U.S., but we think there's a significant opportunity there for alts, and that builds on what we're building with Scotia and the potential in Asia.
You mentioned the Investor Day, so maybe we get a little-
Yeah
... sneak peek in terms of what to expect for November in terms of... Should we expect updated new financial targets? Is there gonna be a particular focus on any one area of your business?
You know, it's been a while since we've done an Investor Day, and we think that's, it's a good practice to, to, bring our story to all, all of you as investors, to introduce you to the management team. We know how important the management team is to investing, so it's gonna give you a chance to, to see, the new management team in SLC, to go a little bit deeper into things like DentaQuest and, and some of those types of things, and a chance to understand the story. So we're, we're looking forward to, having that sort of, I'll call it a refresh of our story. I wouldn't expect that you're gonna see, you know, massive changes, but a chance to meet the management team and see how we're thinking about things. You'll have to wait until November to see if there's any new guidance.
Okay. Keep the suspense.
Keep the suspense for then, yes.
Only a few months away.
Yeah.
I want to talk about capital generation. You provided some new disclosure on organic capital generation, CAD 588 million in Q2. So the question is: Is that a typical quarter? Can we annualize that, and why did you decide to disclose this now? Why was now the right time for that?
First, obviously, in an insurance business, long-term business, capital is a really important thing, and capital flexibility is something that. The capital flexibility and the capital strength we've built into Sun Life is something we feel pretty strongly about. So, you know, we've talked before about 25%-35% free capital that can be after dividends, that can be used for M&A or for buybacks. We were sort of setting that range. We've outperformed that the first two quarters of this year, largely because of the CSM I talked about earlier, right? We've had really good CSM results, which add capital, which have given you that sort of overperformance in the first two quarters. So we'd be ahead of the 25%-35% range. I think we're pushing 60% last quarter.
So that's, you know, we're just trying to show, be very transparent, where it's coming from, and then we will use capital for the additional capital, either for M&A, if there's acquisitions that either add scale or capabilities that we see as strategic, that hit our MTOs and our financial hurdles, and that we believe we can execute. So that's the lens we use. And then, when we have excess capital, we announced a buyback earlier, then we use that in buying back our shares. So we just wanted to be clear, and demonstrate the strength and flexibility and resilience of our capital.
I mean, you mentioned buybacks. You know, one question I had. I mean, it was a stronger question probably before you reported Q2, and then the stocks you know definitely had some strength here, rallying. But you have a buyback, but it struck me as being sort of on the lower end of maybe what I would have expected, given you know where valuation was at the end of Q1, given you know CAD 2 billion of Hold co cash. So I'm wondering, you know, I guess the question is: Why not be more aggressive on the buyback?
You know, again, when we're setting the buyback, well, there's a few things. One, we're looking at future uses of capital, and next year, as I mentioned earlier, we have the two buy-ups at BGO and at Crescent. So those will be significant use of capital. We look at other M&A that's in the pipeline and where we can go and, you know, this felt like a good balanced position reflecting those uses of capital coming. So, we feel like that struck the right... Again, I think you see this from Sun Life. We're pretty careful with our capital. What we're buying back is the additional that we'll be generating this year, and that's kind of how we look at it, and then we have this big outlays of capital coming next year with the two buy-ups.
I want to talk about Asia. Obviously, it's an area that-
Yeah
... you have a lot of experience directly in, and you're very passionate about. A big part of the Sun Life story, you mentioned, the performance in Q2 and the work that Manjit's doing. But maybe just, you know, big picture, what I get sometimes from investors, like, there seems to be a lot of, let's say, fear about Asia in terms of uncertainty about economics, politics, and sort of at the back of people's minds, wondering whether those risks are gonna derail the performance. You don't see that really coming through in the results, but that's the fear, so maybe, you know, from your perspective, how you see the risk landscape in Asia right now.
You know, first, if you're new to Asia, I can see why you'd have that fear. I mean, if you don't understand the markets, if you're new to those markets, they're like any market in the world. The U.S. is complex, Canada's complex, Europe's complex. Asia is complex, and if you don't understand those markets, you should be a little afraid. And so we've been in Hong Kong for 130 years plus, in Philippines 130 years plus, China, India, for coming on to 25 years now, Indonesia. So, you know, we understand the markets, we understand the businesses. We have good placement in the businesses. There's probably four or five of us that are in the category of being long-term regional players, and I would put us into that category.
There's obviously two that are really big and, a couple that are bigger than us, and we, we wanna be bigger. But, you know, long term, we still see economic growth there. There's, you know, there's six hundred million people in ASEAN alone. You know, one point three billion people in, in India and China. I probably have the numbers a little bit wrong on that. But there's still massive opportunity and growth there.
But you have to understand the, the markets, you have to understand, how they work, you have to understand the competition, you have to understand the cultures. I was in Beijing, last week, met with the NFRA. So, I mean, you have to be there and be active to be able to manage those things. If anything, there's probably opportunities that are coming now. So I feel quite strongly that if you understand Asia, and you manage it well, there's opportunities.
What about regulatory risk? I mean, we've seen sort of a number of jurisdictions look into sales practices, and that's impacted sales in the near term. Is that a risk that could spread and become something bigger?
Again, I think it's a risk that faces us in every market. I think what the regulator is doing makes a lot of sense in most of the markets. We weren't the target of. I know there's been a couple things, there's been some things in Hong Kong and Vietnam. We weren't the target of either of those, and we actually had very little impact. They may impact the industry overall, and if they do that, that will impact us, and that was certainly the case in Vietnam. But, you know, again, understanding the business, understanding the risk, I think it's important that you have really good people like Manjit there. We put Manjit there for a reason.
He spent three years as CFO. He's a strong leader. He understands the cultures. As CFO, he and I spent a lot of time together in Asia. As you know, I spent a few months there getting ready for Manjit to go. So I think it really comes down to having that deep understanding of those markets, and if you don't have that deep understanding, you should be afraid.
In the short time we have left, I wanted to talk about a topic that you alluded to. You talked about PinnacleCare.
Yeah.
You did the deal for Dialogue. Broadly speaking, you're incorporating value-added, I'm gonna call it health services, into your product offerings. I'm just wondering if you could help us understand that strategy, the real benefits that you generate from those sort of additional services, if you can comment.
Yeah. Thanks, Meny, thanks for that question. I think if you look at us as being a large group benefits player in Canada and in the U.S., and eventually I think that will be the case in Asia as well, health alongside of those group benefits business is pretty important. And it helps us compete for new mandates, new sponsors. It helps us manage expenses and claims costs at different times. It provides much better service for the members. So we added PinnacleCare and some other pieces, but in the U.S., but in Canada, the acquisition of Dialogue. We added a pharmaceutical benefits business called Pillway, which delivers directly to your home. We've been building out Lumino, which is our sort of digital aspect of that.
I think creating that continuum alongside of your life and health benefits piece makes it easier to win new business and to be a player in those markets. And you see the benefit of that in our results. We talked about earlier, the strength in Canada, the strength in the U.S. group benefits, making sure that we're a long-term player in those businesses is pretty important to us, because, again, low capital, repriceable, it comes down to service and capabilities.
Okay, with that, we're out of time, but I wanna thank you.
Thanks, Meny.
It's always great catching up with you.
Thanks. Yeah.
Thanks so much.
Thanks for having us. Thanks. Thanks, thanks, thanks.
Now I'd like to call up, Paul Mahon, President and CEO of Great-West Life.