Tom MacKinnon

Tom MacKinnon followed up on the Eurolife transaction, asking about the impact of the $3.4 billion in assets being sold on future interest and dividend income, and which financial statement line item would reflect this decline.

Answer

Peter S. Clarke, President and COO of Fairfax Financial, stated that the majority of the impact on interest and dividend income would be seen in the life and run-off business segment, as the property and casualty business remains with Fairfax. He also noted that the $950 million proceeds from the sale would eventually be redeployed to generate new earnings. Amy Sherk, CFO, added that under held-for-sale accounting, investments continue to be marked-to-market and income recorded until the transaction closes.

Tom MacKinnon with BMO Capital Markets followed up on the Eurolife transaction, asking if the $3.4 billion in assets would no longer be part of Fairfax Financial's general fund, how this would impact future interest and dividend income, and which financial statement line item (interest and dividend income or life and run-off business) would reflect this decline.

Answer

Peter S. Clarke, President and COO, and Amy Sherk, CFO of Fairfax Financial, clarified that the majority of the impact on interest and dividend income would be seen in the life and run-off business segment, as the P&C business remains with Fairfax. Peter Clarke noted that the company expects to receive approximately $950 million for the life business, which will eventually be deployed to generate new earnings. Amy Sherk added that under 'held for sale' accounting, the investments continue to be marked-to-market, and income earned on them is recorded until the transaction closes.

Tom MacKinnon asked for an update on the company's priorities for deploying its holding company cash, specifically regarding share buybacks and minority interests.

Answer

Peter Clarke, President and COO, outlined the capital allocation priorities. The top priority is maintaining financial strength. Other considerations include addressing upcoming preferred share maturities, opportunistically buying back minority interests in well-known subsidiaries like Odyssey and Allied World, and continuing to repurchase common stock, which they believe is well-valued, without compromising financial strength.

Tom MacKinnon asked for Fairfax's priorities regarding the deployment of its holding company cash, specifically mentioning preferred share buybacks, acquiring remaining minority interests, and common stock repurchases.

Answer

Peter Clarke, President and COO, outlined a clear capital allocation hierarchy. The top priority is maintaining financial strength, including holding company cash and a robust credit facility. Next is addressing upcoming preferred share maturities. While not seeking major acquisitions, Fairfax would consider buying back minority stakes in well-known holdings like Odyssey and Allied over time. Lastly, the company will continue share buybacks as long as the stock is well-valued and financial strength is not compromised.

Tom MacKinnon noted Fairfax's strong financial condition and the significant Q2 increase in share buybacks, asking about the company's appetite for future repurchases and its view on the stock's valuation.

Answer

Peter Clarke, President and COO, affirmed that after prioritizing financial strength and supporting its insurance companies, Fairfax is using excess capital for buybacks. He stated that management believes the shares are at "great prices" and intends to continue the repurchase program.

Tom MacKinnon from BMO Capital Markets asked about the significant increase in share buybacks during the quarter and what this signals about management's view on the stock's valuation.

Answer

President and COO Peter Clarke explained that Fairfax's top capital allocation priority is maintaining financial strength, defined by over $1 billion in cash at the holding company, no near-term debt maturities, and a $2 billion unused credit line. With insurance premium growth leveling off, the well-capitalized insurance subsidiaries are now producing excess capital and strong dividends for the holding company. Clarke confirmed that Fairfax has been using this capital to repurchase shares, stating, 'We think they're at great prices, and we'll continue to do that going forward.'

In a follow-up question, Tom MacKinnon of BMO Capital Markets asked about the higher overall expense ratio in the quarter and for guidance on how to think about this metric going forward.

Answer

Peter Clarke, President and COO, attributed the approximate one-point increase in the expense ratio to two main factors: the consolidation of Gulf Insurance, which operates with a higher expense ratio, and a shift in the business mix that impacted commissions. He also noted that ongoing investments in technology and personnel contributed to the uptick.

Asked about the company's strategy regarding its total return swaps and share buybacks, and later inquired about the rising expense ratio and its future outlook.

Answer

The company views its own stock as a good investment, justifying both the total return swaps (held until 2025-2026) and ongoing buybacks, which are balanced against financial strength. The higher expense ratio is attributed to the consolidation of Gulf Insurance, business mix changes, and investments in technology and personnel.

Tom MacKinnon of BMO Capital Markets inquired about Fairfax's strategy for its total return swaps on its own shares, including their duration and settlement mechanics, and how this approach aligns with the company's ongoing share buyback program.

Answer

Peter Clarke, President and COO, explained that Fairfax considers its total return swap (TRS) position a great investment, with contracts expiring in 2025 and 2026 that can be extended. He noted that approximately half of the contracts reset quarterly. Regarding share repurchases, Mr. Clarke affirmed the company's positive view on its stock value but emphasized that buybacks are always balanced against maintaining financial strength and ratings.

Tom MacKinnon inquired about the future treatment of Non-Controlling Interests (NCI) for SLC after the minority buy-ins and the implementation of the management equity plan. He also asked about potential operating expense synergies between MFS and SLC, and the outlook for the volatile Asia joint ventures and other income line.

Answer

Tim Deacon, EVP and CFO, Sun Life Financial, explained that existing NCI will be replaced by the management equity plan (up to 25% employee ownership), with enhanced disclosures in Q1. Steve Peacher, CEO, SLC Management, highlighted the significant employee cash buy-in and its positive impact on culture and growth. Tom Murphy, Head of Asset Management, Sun Life Financial, stated that the focus is on growth opportunities, not expense synergies between MFS and SLC due to different operating models. Manjit Singh, President, Asia, Sun Life Financial, attributed JV income volatility to securities gains/losses, noting full-year earnings were up 10% and expecting continued good growth.

Tom MacKinnon inquired about the future of Non-Controlling Interest (NCI) for SLC after the minority buy-ins, and how the new management equity plan would impact it. He also asked about the cash flow implications of the buy-in and if there were opportunities for operating expense synergies between MFS and SLC under the new Sun Life Asset Management (SLAM) structure. Finally, he asked Manjit Singh about the volatility and outlook for Asia's joint ventures and other income.

Answer

Tim Deacon, EVP and CFO, Sun Life Financial, explained that the existing NCI would be replaced by the management equity plan, with employees owning up to 25% of SLC, and enhanced disclosures would follow. Steve Peacher, CEO, SLC Management, clarified that employees would put up hundreds of millions in cash, supplemented by preferred equity from Sun Life. Tom Murphy, Head of Asset Management, Sun Life Financial, stated the focus for SLAM is 100% on growth opportunities, not expense synergies, due to different operating models and buying centers for traditional and alternative asset managers. Manjit Singh, President, Asia, Sun Life Financial, explained that JV income volatility is due to securities gains/losses, but full-year earnings were up over 10%, which is a decent rate for future outlook.

Tom MacKinnon asked about the outlook for the Medicaid dental loss ratio, expected improvements from pricing in 2026, and potential resets to U.S. PA business earnings. He also questioned why share buybacks aren't increased given strong organic capital generation, and inquired about the drivers and sustainability of Canada's 'other fee income' growth.

Answer

David Healy, President of Sun Life U.S., noted that rising utilization in Medicaid dental is offsetting pricing gains, with Q3 being seasonally high and Q4 expected to improve, leading to gradual loss ratio improvement in 2026. Brennan Kennedy, SVP and Chief Actuary, confirmed annual earnings resets for short-term insurance. Kevin Strain, President and CEO, addressed capital, citing the upcoming CAD 2 billion SLC buy-in and commitment to consistent buyback levels. Jessica Tan, President of Sun Life Canada and EVP, attributed Canada's fee income growth to strong asset management and wealth (Alcor up 13%, AUM up 11%) and group business premium growth (6%), expecting continued momentum.

Tom MacKinnon asked about the outlook for the Medicaid dental loss ratio, including expected improvements from pricing benefits in 2026 and potential resets to expected earnings. He also questioned if negative insurance experience would continue at the current level or improve. Later, he inquired why Sun Life isn't stepping up share buybacks given strong organic capital generation, and asked about the drivers and sustainability of increased other fee income in Canada.

Answer

David Healy, President of Sun Life U.S., noted that while pricing is a focus, rising utilization has offset some gains, and gradual improvement in the loss ratio is expected in 2026, with Q3 being seasonally high. Brennan Kennedy, SVP and Chief Actuary, confirmed earnings on short-term insurance are reset annually. Kevin Strain, President and CEO, explained that share buybacks are balanced with preparing for $2 billion SLC buy-ins and maintaining a consistent approach. Jessica Tan, President of Sun Life Canada and EVP, attributed Canada's fee income growth to strong asset management and wealth, and increased group business premiums, expecting continued momentum.

Tom MacKinnon from BMO Capital Markets inquired about the drivers behind the strong 'other fee income' line and its sustainability, as well as the significant drop in 'other expenses' and whether this represents a new run rate.

Answer

EVP & CFO Tim Deacon attributed the strong fee income to growth in ASO and wealth businesses in Canada and Asia, noting the level was elevated this quarter. Regarding expenses, he explained the decline was mainly due to timing of initiative spend in the Corporate segment and guided that a quarterly loss of around $100 million for that segment is a more realistic run rate.

Tom MacKinnon from BMO Capital Markets inquired about the drivers of the strong 'other fee income' line and the significant sequential drop in 'other expenses,' asking if these levels represent a new run rate.

Answer

EVP & CFO Tim Deacon attributed the higher fee income to strong performance in wealth businesses in Asia and Canada, ASO fees, and care delivery services, noting the quarter was elevated. He explained the lower expenses were mainly due to the timing of initiative spend and incentive compensation in the Corporate segment, and guided that the Corporate segment loss should be viewed closer to $100 million per quarter going forward.

Tom MacKinnon asked about SLC Management's progress towards its $235 million earnings target for 2025, the impact of catch-up fees, and for clarification on the structure of the upcoming minority interest buy-ups.

Answer

Stephen Peacher, President of SLC Management, expressed confidence in the $235 million target, noting Q1 was elevated by catch-up fees and seed income but that core management fees show solid growth. President & CEO Kevin Strain added that large catch-up fees are a positive indicator of successful fundraising. Regarding the buy-ups, Mr. Peacher clarified that the $2.3 billion liability noted in the financials assumes a 100% buy-up, but the final structure, including potential employee ownership, is still under active discussion.

Tom MacKinnon inquired about the U.S. stop-loss business, focusing on the Q4 loss ratio, pricing trends, and the completeness of claims data. He also asked about organic versus actual capital generation and plans for share buybacks.

Answer

Daniel Fishbein (executive) explained the stop-loss loss ratio was 74% for the full year 2024, driven by higher claims severity. He noted a 14% price increase was achieved for Jan 1, 2025, with another 2% needed. Timothy Deacon (CFO), Kevin Morrissey (executive), and Kevin Strain (CEO) addressed capital, confirming strong actual capital generation despite reported earnings volatility and reiterated the plan to continue share buybacks.

Tom MacKinnon questioned the long-term strategic value of the MFS partnership, highlighting its consistent net outflows and how this challenges Sun Life's growth objectives. He also asked if MFS was included in the company-wide expense reduction plan.

Answer

Kevin Strain, President & CEO, affirmed that MFS is an important part of Sun Life's overall asset management strategy and is factored into their medium-term objectives. He acknowledged the cyclical headwinds from shifts to passive and alternative investments but expressed confidence in MFS's strategy. Strain also highlighted MFS's significant contribution to Holdco cash flow, which has enabled Sun Life's M&A and capital deployment activities over the past decade.

Tom MacKinnon (BMO Capital Markets) asked about the significant increase in Hong Kong's NBV margin, questioning if it was driven by a more profitable mix from agency and bank channels compared to the broker channel, and why the company continues to focus on the MCV broker channel. He also inquired about the expected impact of the Comvest acquisition on Global WAM earnings, considering the eMPF transition, and the company's intentions regarding the new 2.5% NCIB program given past aggressive buybacks.

Answer

Steven Finch, Chief Actuary, confirmed the margin increase was due to a favorable product and channel mix, with MCV broker sales being lower margin but still attractive. He emphasized optimizing for dollar value while meeting ROE targets. Paul Lorentz, President and Global CEO, stated that Comvest was a positive contributor to AUMA, gross/net flows, and core earnings, tracking as expected, and expressed optimism for future growth similar to CQS. Philip Witherington, President and CEO, affirmed the intention to complete the 2.5% NCIB program, viewing it as a balanced capital deployment strategy that doesn't constrain organic investments.

Tom MacKinnon inquired about the significant increase in Hong Kong's NBV margin, asking if it was driven by a more profitable sales mix from agency and banca channels compared to the broker channel, and the rationale for focusing on the MCV broker channel. He also asked about the impact of eMPF and Comvest on Global WAM earnings and Manulife's intentions regarding the new 2.5% NCIB program.

Answer

Steven Finch, Chief Actuary, Manulife Financial, confirmed the margin increase was due to a mix shift, with the MCV broker channel being lower margin. He noted Manulife optimizes for volume versus margin, with the domestic agency business providing strong margins and growth, alongside a product mix shift towards health and protection. Paul Lorentz, President and Global CEO of Global Wealth and Asset Management, Manulife Financial, stated that about half of the eMPF impact is reflected, and Comvest is tracking as expected, positively contributing to AUMA, gross flows, net flows, and core earnings. Philip Witherington, President and Chief Executive Officer, Manulife Financial, affirmed the intention to complete the 2.5% NCIB program in full, viewing it as an appropriate use of capital that doesn't constrain organic investments.

Tom MacKinnon asked about the rationale behind Manulife's refreshed strategy, given the recent 2027 targets, inquiring if it's driven by new leadership and a shift towards more balanced growth across the portfolio, including investments in Canada and the U.S., and its implications for future share buybacks.

Answer

Phil Witherington, President and CEO, stated the refresh acknowledges the success of the previous strategy but emphasizes adapting to an evolving external environment for long-term success beyond 2027. He confirmed balanced growth is key, with Asia and Global WAM remaining compelling, but also sees opportunities to invest and grow new business in Canada and the U.S. to sustain scale and diversification. He clarified that the strategy aims for presence in mega economies, citing the India entry. He reiterated that capital generation remains strong, with organic investment and dividends as top priorities, and buybacks continuing to be an important form of capital deployment.

Tom MacKinnon asked about the rationale behind the refreshed strategy, inquiring if it was driven by a new leadership team and the shift towards more balanced growth across the portfolio, including investments in Canada and the U.S., and its implications for share buybacks.

Answer

Phil Witherington, President and CEO of Manulife Financial Corporation, stated the refresh was timely given the evolving external environment. He emphasized balanced growth, with Asia and Global WAM remaining key, but also investing in Canada and the U.S. to sustain scale and growth. Capital deployment priorities remain organic investment and dividends, with buybacks as possibilities.

Tom MacKinnon from BMO Capital Markets asked for details on the expected trajectory of GWAM margins post-eMPF transition, the rationale for changing the core earnings definition, and specific accretion metrics for the Comvest acquisition.

Answer

Paul Lorentz, President and CEO of Global WAM, projected an approximate 150 basis point drop in GWAM margin post-transition, followed by renewed growth. CFO Colin Simpson stated the core earnings definition change aligns with industry practice and the Comvest deal will add about $30 million in annual amortization, which will now be excluded from core earnings. He also quantified the deal's accretion at roughly $0.02 to $0.03 to annual core EPS from 2026 onwards.

Tom MacKinnon from BMO Capital Markets questioned the company's appetite for further legacy block transactions and asked for the drivers behind the strong insurance experience gains in Asia.

Answer

Marc Costantini, Global Head of In-Force Management, stated that with recent LTC and VA transactions, the derisking mission is "mission accomplished," and there is no need for another deal, though they will continue to optimize the balance sheet. CFO Colin Simpson added that the strong capital position allows for buybacks without needing new transactions. Chief Actuary Steven Finch attributed the Asia insurance gains to favorable mortality and morbidity claims across several markets.

Tom MacKinnon asked about the remittance contribution from the Canadian universal life reinsurance deal, the sustainability of improved insurance experience in Canada and the U.S., and the 'business as usual' component of the new 3% share buyback program.

Answer

CFO Colin Simpson clarified the Canadian UL deal did not contribute to remittances. Executive Steven Finch noted that improved U.S. lapse experience is sustainable, while a P&C provision release was a one-off. CEO Roy Gori explained that about two-thirds of the new buyback program is incremental, supported by strong capital generation beyond the capital released from reinsurance deals.

Tom MacKinnon of BMO Capital Markets pointed to sluggish APE sales in the 'Asia Other' segment and asked if a recent 9% quarter-over-quarter increase in agent count was a strategy to reignite growth. He also asked about the ongoing negative lapse experience in the U.S. business and its potential implications for the upcoming Q3 assumption review.

Answer

Philip Witherington, Head of Asia, clarified that the 'Asia Other' APE sales decline was due to moderation in China and that the focus is on agent productivity, not headcount. Chief Actuary Steven Finch acknowledged the U.S. lapse losses, noting rates are slow to normalize post-pandemic, and stated the upcoming Q3 review will have the usual pluses and minuses.

Tom MacKinnon from BMO Capital Markets asked for a breakdown of the insurance experience gains in the Capital and Risk Solutions (CRS) segment and questioned the drivers of weaker margins and negative operating leverage in the Canada Wealth and Retirement businesses.

Answer

Group CFO Jon Nielsen detailed that the CRS results included the California wildfire provision, unfavorable mortality, and a positive provision release from a resolved client issue. For Canadian margins, Fabrice Morin, President and COO of Canada, explained that a change in overhead allocation has resulted in the larger Wealth business attracting more corporate expenses, establishing a new normalized margin level. Jon Nielsen suggested a 20% pretax operating margin for Canada Wealth would be a reasonable run rate going forward.

Tom MacKinnon requested a breakdown of the insurance experience gains, particularly in the Capital and Risk Solutions (CRS) segment, and questioned the drivers of weaker margins and negative operating leverage in the Canada Wealth and Retirement businesses.

Answer

Group CFO Jon Nielsen detailed three factors in CRS: the California wildfire provision, unfavorable mortality experience, and a positive provision release from a resolved client contract. Fabrice Morin, President and COO of Canada, addressed the Canada Wealth margin, attributing the quarterly performance to seasonality (higher marketing spend for tax season), fewer fee-collection days in Q1, and a new, higher overhead allocation to the wealth business reflecting its larger scale post-acquisitions.

Tom MacKinnon asked for a breakdown of the insurance experience gains, particularly in the Capital and Risk Solutions (CRS) segment, and questioned the drivers of the weak margin in the Canada Wealth business, including expense seasonality.

Answer

Group CFO Jon Nielsen detailed three factors in CRS: the California wildfire provision, unfavorable mortality experience, and a positive provision release from a resolved client contract. For Canada Wealth, Fabrice Morin, President and COO of Canada, attributed the lower margin to Q1 seasonality (marketing spend, fewer fee days) and a new, higher overhead allocation due to the integration of acquired businesses. He suggested a normalized run-rate margin of around 20% going forward.

Tom MacKinnon of BMO Capital Markets asked about the company's target for its holding company cash balance, the reason for net outflows at Empower DC related to stock plan services, and the cause for the year-over-year decline in U.K. insurance and annuity sales.

Answer

CFO Jon Nielsen and CEO Paul Mahon confirmed the minimum holdco cash target remains around $500 million, with the current $2.2 billion balance reflecting strong capital generation. Empower CEO Ed Murphy explained the stock plan outflows were a timing issue, with exercises in Q4 and grants in Q1. David Harney, President and COO of Europe, stated the U.K. sales volatility was due to the lumpy nature of large bulk annuity transactions, and the business remains strong.

Tom MacKinnon from BMO Capital Markets asked about the ongoing fee pressure in Canadian asset management and the mechanics of a potential Corient IPO, specifically regarding where debt would reside and how minority investors' liquidation preferences would be handled.

Answer

Executive Kurt MacAlpine attributed fee pressure to both cyclical factors (conservative asset allocation) and structural changes (lower-priced new products). Regarding a Corient IPO, he clarified that debt assigned to Corient is intended to 'travel with the business' in a separation. He also explained that minority investors' equity would roll into common shares in an IPO, or would be settled in cash if CI chose to buy them out directly, confirming it is not a debt obligation.

Questioned the funding source for M&A obligations, the rationale for using debt instead of free cash flow while continuing buybacks, and the use of future debt at Corient for inorganic growth.

Answer

M&A obligations are paid from a fungible pool of cash from operations and the credit facility. The company is comfortable with its leverage and sees share buybacks as the most accretive use of capital at current prices. Debt raised at Corient will be used to fund its own M&A, and the market for high-quality RIA acquisitions is expected to present good opportunities.

Tom MacKinnon questioned whether M&A obligation payments were funded by debt and the rationale for prioritizing this over using free cash flow and slowing share buybacks. He also asked if debt raised at Corient would fund inorganic growth and about the current M&A opportunities.

Answer

CFO Amit Muni and Executive Kurt MacAlpine explained that cash is fungible and obligations are met with a combination of free cash flow and the credit facility. They stressed their comfort with current debt levels, noting a market value leverage of 2.9x, and view share buybacks as the most accretive use of capital. Mr. MacAlpine confirmed Corient will fund its own M&A via its cash flow and future debt, and that he sees a good M&A market ahead with high-quality firms becoming available now that Corient is 'debt ready.'

Asked for a breakdown of free cash flow by business segment, questioned the low non-controlling interest figure in the cash flow statement, and inquired if inorganic action is needed to spur U.S. Wealth growth after a weak Q4.

Answer

The company does not disclose free cash flow by segment but suggested a conversion rate from EBITDA as a guide and will consider future disclosure. The Q4 revenue dip in U.S. Wealth was a one-off billing timing issue, and the overall annual performance (42% EBITDA growth) was very strong, so no immediate inorganic action is deemed necessary. The NCI cash flow question was deferred to an offline discussion.

Asked for a free cash flow breakdown by geography (Canada vs. U.S.) and questioned the rationale for deleveraging attractive long-term debt with Canadian cash flow instead of focusing solely on buybacks.

Answer

Executives stated that EBITDA is a good proxy for cash flow by segment and more disclosure is coming. They clarified that Canadian cash flow will be used for both deleveraging and opportunistic buybacks, maintaining a dynamic capital allocation approach, while U.S. cash flow is earmarked for U.S. growth and obligations.

Questioned the drivers of net outflows in Empower's defined contribution business, asking if higher market values will consistently lead to outflows. Also asked about the significant quarter-over-quarter drop in Empower's operating expenses and the outlook for that line item.

Answer

Higher account balances increase the dollar value of withdrawals, but the volume of participants taking distributions is not significantly higher, and rollover captures into wealth products are also up. Future growth is expected from new plan formation. The expense drop was due to realizing $20M in Prudential synergies in Q2; the underlying workplace expense growth is expected to be in the 3-4% range going forward.

Asked about the margin dynamics in Canadian Group Life and Health, sought clarification on the timing of Prudential synergy realization, questioned the impact of interest rates on stable value margins, and reconfirmed Empower's earnings growth guidance.

Answer

The company explained that the lower margin in Canadian Group L&H was due to the onboarding of a large, lower-margin ASO government contract. They confirmed the interpretation of the synergy realization timeline, with costs actions taken and earnings benefits flowing through over the next year. While credited rates on stable value products have modestly increased, the higher rate environment is a net positive for earnings on surplus. They reaffirmed the 15-20% base earnings growth guidance for Empower in 2024.

Asked for clarification on the accounting for the Franklin Templeton shares, the drivers of Europe's fee income and experience gains, the reason for a lower earnings ratio in the Canadian group business, and the sustainability of Canadian disability insurance gains.

Answer

The Franklin shares are treated like other non-fixed income investments with an 8-9% expected return, with mark-to-market changes hitting net earnings. Europe's performance was driven by market growth, net inflows, and strong group risk results. The Canadian earnings ratio was diluted by the large, new federal plan premium which has a longer-term profitability profile. The Canadian disability gains are attributed to disciplined pricing, claims management, and a successful regional rehabilitation model.

Asked for quantification of trading gains, the impact of interest rates on equity release mortgages, and the reasons for modest participant growth at Empower. In a follow-up, he asked for a breakdown of the market experience impact and the reason for the large interest rate-related gain.

Answer

Trading gains were modest this quarter (~$13M) compared to prior periods because quality assets supported new business CSM growth instead of flowing to in-period earnings. Empower's participant growth is ~5% YoY, outperforming the market, with strength in the small plan market offsetting lumpiness in large plan sales. The positive market experience was driven by a ~$300M pre-tax gain from interest rates (due to how non-fixed income-backed liabilities are discounted) offset by a ~$150M loss from non-fixed income returns.