Sun Life Financial Inc. (NYSE:SLF) Q1 2023 Earnings Call Transcript May 12, 2023

Operator: Good morning and welcome to the Sun Life Financial Q1 2023 Conference Call. My name is Michelle and I will be you’re operator today. [Operator Instructions] The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton.

Yaniv Bitton: Thank you, operator and good morning everyone. Welcome to Sun Life’s earnings call for the first quarter of 2023. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at sunlife.com. We will begin today’s call with opening remarks from Kevin Strain, President and Chief Executive Officer. Following Kevin, Manjit Singh, Executive Vice President and Chief Financial Officer will then present the financial results for the quarter. After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management are also available to answer your questions this morning. Turning to Slide 2, I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today’s remarks.

As noted in the slides, forward-looking statements maybe rendered inaccurate by subsequent events. And with that, I will now turn things over to Kevin.

Kevin Strain: Well, thanks, Yaniv and good morning to everybody on the call. Turning to Slide 4, we started 2023 with strong results driven by our execution capabilities and growth across both our health and protection businesses, highlighting the resilience of our business mix and the importance that our clients continue to place on health and financial security. This is Sun Life’s first quarter reporting under IFRS 17 and IFRS 9, a special thank you to all the Sun Life employees involved in these efforts. With the adoption of these standards – while the adoption of these standards will impact how and when some of our business results are reported, it does not change our strong fundamentals, capital strength or client impact strategy.

While global markets remain challenging for our asset management businesses, we continue to see strong fundamentals and performance from MFS and SLC management. MFS AUM has increased since the end of last year and net flows have improved year-over-year. SLC management re-related earnings were up over 20% year-over-year on higher fee earnings AUM, reflecting strong capital raising and deployment across the platform. SLC Management also completed the acquisition of a 51% interest in Advisors Asset Management and are commencing the development of alternative products to meet the demand of high net worth individuals. Sun Life U.S. had a strong first quarter underlying earnings, reflecting strong premium growth, contributions from DentaQuest and meaningful improvement in mortality and disability experience.

DentaQuest had strong business growth during the quarter, with significant Medicaid and commercial business wins. These contracts awards, along with other dental sales in the quarter will allow us to improve preventative care and oral health outcomes for an additional 650,000 members as they are onboarded over the next year. Sun Life Canada also achieved strong earnings during the quarter, driven by growth across all business lines. We closed the sale of our sponsored markets business, releasing capital and enabling greater focus on growing the core segments within our Group Benefits business while continuing to extend our focus to help our clients access healthcare and wellness solutions. We maintained great momentum in Sun Life Asia, achieving 24% overall sales growth and over 20% insurance sales growth in 5 of our markets, including our 4 largest markets, the Philippines, Hong Kong, India and international.

Notably, Hong Kong sales were up significantly as a result of tailwinds from the reopening of the border with Mainland China paired with uplifts from new product offerings. Our Philippines business achieved the number one market position for new business premiums and total premiums again in 2022. This is our 12th consecutive year leading the market in total premiums. We also announced a 15-year exclusive bancassurance partnership in Hong Kong with Dawson Bank, where Sun Life will be the exclusive provider of life insurance solutions to dosing Bank’s approximately 570,000 retail banking customers. We remain excited about the opportunity to further our growth in Asia as markets are open following pandemic restrictions and will leverage our quality distribution channels to meet the protection, health, savings and investment needs of a rising middle class.

Further to our strong earnings and sales performance over the quarter, new business contractual service margins, or CSM, of $257 million was up 50% year-over-year, driven by the impact of new insurance business in Canada and Asia. Total CSM reached $11.2 billion at the end of the quarter. Underlying ROE for the quarter was 17.3% and continues to trend towards our medium-term objective of 18% plus, reflecting our disciplined capital management and sustained emphasis on capital-light businesses. We also ended the quarter with a very strong capital position with a LICAT ratio of 148% at SLF. We announced a $0.03 increase to our quarterly common share dividend demonstrating our commitment to continue deploying capital to shareholders. Turning to Slide 5.

This quarter, we delivered on several key business initiatives that drove our client impact strategy. Helping clients access healthcare and coverage, they need remains a top priority. In the U.S., we are seeing impactful results from our AbleTo partnership, which provides access to virtual behavioral health therapy and coaching for our members with cancer. We began offering this program in Q2 2022 and are already making a difference for participating members, where early results show a greater than 50% reduction in their anxiety, depression and stress levels. This is important as there is a strong correlation between mental health and physical recovery. We continue to increase access to similar services in the first quarter, expanding our partnership, again, with AbleTo to offer self-care an on-demand wellness program to support mental health for our life insurance members and partnering with GoodPath to provide digital personalized care and coaching to improve outcomes for members with certain disability diagnosis.

These services help differentiate our offering in the U.S. while broadening access to programs that help people live healthier. Furthermore, Sun Life Health Navigator powered by Pinnacle Care is providing personal care navigation services to help members access timely and quality care as well as expert medical opinions with benefit members – which benefits members with diagnosis and treatment plans. Recently, our services helped a member’s 8-year-old daughter with a severe eye injury who had been recommended a surgical procedure with a low success rate. A personal health adviser connected the member to an ocular trauma specialist who recommend that they not do the surgery. As a result, the child’s eye is healing giving her by the comfort in making medical decisions with our support.

We continue to leverage our digital capabilities and product innovation to help clients achieve lifetime financial security. We recognize the importance of having a comprehensive financial plan that focuses on wealth, insurance and protection services. We’re committed to providing our clients with the tools and advice they need to build financial confidence and navigate through important life stages. In Canada, we enhanced the Sun Life One Plan digital tool, enabling clients to update their financial road maps directly while collaborating with their advisers on personalized goals. We introduced this tool to retail clients in 2022 and in 2023 and extended that to over 750,000 Canadian GRS clients this year. Nearly 100,000 financial roadmaps have been created to date for retail clients in Canada using tools, including Sun Life One Plan.

In Hong Kong, we launched two new products designed to offer clients long-term financial growth potential, which actively integrate ESG concepts into investment strategies. Client reception for these products is strong, contributing to over 20% of Hong Kong’s Q1 individual sales. We are also embracing our responsibility to create a more sustainable and brighter future. Sun Life has made a commitment to being sustainability driven. It’s critical to our purpose that we are focused on increasing financial security, fostering healthier lives and advancing sustainable investing areas we know best. One key area of focus is climate change and Sun Life is committed to being part of the climate solution. We set a goal to achieve net 0 greenhouse gas emissions in our operations and investments by 2050 and have established several interim targets for our general account and asset management businesses.

To achieve our goal and contribute to the wider global movement to Net Zero, we continue to collaborate with advocate programs and policies that can help drive the transition to a low-carbon economy. Furthermore, SLC Management continues to invest in assets that generate a stable and attractive yield and that generated a positive environmental impact. For example, this quarter, SLC management invested in the construction of 2 new vessel builds that will support the long-term operation and maintenance of 2 offshore wind farms in the UK, which supply power to 2 million households each year. These vessels will support environmental clean operations and the use of alternative fuels. Keeping on the theme of sustainability and our commitment to diversity equity inclusion Sun Life was named among the companies in the Globen Malls 2023 Report on Business Women Lead Hear List This is the fourth year in a row SunLife was recognized for its commitment to achieving gender parity at BPs roles and helping women thrive in corporate Canada.

We’re also pleased that Sun Life was recognized among America’s best employers for diversity by Fort magazine in the U.S. and congratulations to Laura Money, our Chief Information and Technology Officer for being recognized as one of the top CIOs in North America by Business cheap. Laura’s been instrumental in driving our digital transformation and innovation efforts. Finally, trust is at the heart of our business. And around the world, we continue to be recognized for our trusted brand. This quarter, Sun Life Philippines received the Platinum Award in the Life Insurance Category in the Trusted Brand Awards for the 13th consecutive year demonstrating our ability to make a difference in our clients’ lives and helping us sustain our market leadership position.

While the external environment remains challenging and uncertain, we are confident that our diversified and capital-light business mix, strong capital position and prudent approach to risk management will allow us to manage through market volatility and more importantly, continue to help our clients achieve life confidence and security and live healthier life. And with that, I will turn the call over to Manjit, who will walk us through the first quarter financial results.

Manjit Singh: Thank you, Kevin, and good morning, everyone. I’d like to begin by thanking all the teams across Sun Life who worked tirelessly to ensure a smooth transition to the new IFRS 17 and IFRS 9 reporting standards. This was a significant multiyear undertaking for Sun Life and the industry culminating with the release of our first quarter results today. The impact of transition to IFRS 17, are generally in line with what we had previously communicated. The impact of SLF LICA was an increase of 12 points slightly better than the high single-digit estimate we provided in February as we continue to refine our estimates with the finalization of our dual reporting period. We are also reaffirming our medium-term financial objectives, including underlying ROE of 18% plus, up from 16% plus.

Underlying EPS growth of 8% to 10% and underlying dividend payout ratio of 40% to 50%. Now let’s turn to Slide 7, which provides an overview of our first quarter results. Sun Life had a strong start to the year with a good underlying earnings growth, an underlying ROE of 17.3% and a strong capital position. Underlying net income of $895 million and underlying earnings per share of $1.52 were up 24% from the prior year, reflecting the strength of our business fundamentals and the benefits of our diversified mix. Sun Life provides three main types of services to our clients, wealth and asset management, group and health protection and individual protection. Wealth and Asset Management businesses comprise approximately 40% to 45% of our earnings.

These businesses generate fee-based earnings and spread income on investment products. Drivers of underlying results include net client flows, impact of markets and asset values, spreads over crediting rates on guaranteed products and operating margin. Wealth and Asset Management results were resilient this quarter. While Asset Management earnings were impacted by global equity market declines over the past year, this was mostly offset by higher wealth management earnings. Higher wealth management investment income was driven by volume growth and increase in asset yields. Group and health protection businesses comprised approximately 30% of our earnings and include Sun Life’s leading positions in Canada and U.S. stock loss, employee benefits and dental.

These businesses generate earnings from shorter-term insurance coverage and fee-based services. The key drivers include premium growth driven by active members and protection coverage provided actual experience relative to expectations and service-related fees. In Q1, group underlying earnings benefited from premium growth favorable experience and higher fee income, including the contribution of DentaQuest. And third, individual protection represents 25% to 30% of our earnings and comprises our longer-term protection businesses. Profitability reflects new sales, which drives premium growth, retention of in-force business, earnings from investing premiums and insurance experience. Individual protection underlying earnings were up year-over-year, driven by premium growth reflecting good sales momentum as well as improved mortality experience in Asia.

We generated new business CSM of $257 million and higher sales in Canada and Asia as well as favorable sales mix in Hong Kong, the Philippines and high net worth. Earnings on surplus were higher across our businesses, reflecting higher realized investment gains and growth in net interest income from higher yields on invested assets. Reported net income for the quarter was $806 million, up 21% from the prior year. The results for this quarter include a gain on the sale of our Canadian sponsored Markets business, partially offset by market-related impacts the acquisition-related costs for DentaQuest and AAM and amortization of acquired intangibles. Market impacts in the quarter were mostly driven by flat total real estate returns, which is lower than our longer-term experience of approximately 2% per quarter.

Our balance sheet and capital position remained very strong, a key strength in this environment. SLF LICA of 148% was up 18 points from the prior quarter, including 12 points from the transition to IFRS 17 and 6 points of organic capital generation in the first quarter, primarily from capital optimization. Our strong LICAT and low financial leverage ratio of 23.2% provides support for continued investment in growing our businesses and future capital deployment. Now let’s turn to our business group performance starting on Slide 9 with MFS underlying net income of $188 million was down 15% from the prior year driven by lower average net assets, largely reflecting declines in global equity markets and net outflows. Reported net income of $200 million was down 12%.

MFS pre-tax net operating margin of 37% was down 2 points from the prior year, reflecting lower average net asset levels. AUM of $570 billion was up 4% from Q4, our second consecutive quarter of sequential growth. Retail net outflows of $1.8 billion and institutional net outflows of $2.4 billion, both improved from the prior quarter. MFS continues to generate – to experience lower U.S. retail redemptions compared to the industry. And another positive in the quarter was approximately $1 billion of net fixed income inflows. Turning to Slide 10, SLC Management generated fee-related earnings of $68 million, up 26% year-over-year. This increase reflects strong net flows and deployment of capital into fee-earning AUM over the past year. Fee-related earnings is an important leading metric for asset managers in the alternative space.

Underlying net income of $28 million was down from the prior year as fee-related earnings growth was more than offset by lower seed investment income and higher compensation expenses. Reported net loss at SLC Management was $17 million, primarily driven by acquisition-related costs. Capital raising of $2.3 billion was a good result for the quarter given challenging market conditions and lower allocation to alternatives as relative weightings have increased due to outperformance versus other asset classes, commonly referred to as a denominator effect. Total AUM of total AUM of $218 billion was up 18% year-over-year. This includes $21 billion that is not yet earning fees. Once invested, these assets are expected to generate annualized fee revenue of more than $180 million.

Turning to Slide 11, Canada’s underlying net income of $316 million and reported net income of $329 million, were both up sharply from the prior year. Wealth and Asset Management underlying earnings were up $34 million, supported by wider investment spreads and volume growth, which more than offset lower fee-based earnings reflecting equity market declines over the past year. Group Health and Protection underlying earnings increased $36 million year-over-year on improved disability experience some higher margins and shorter claim durations. Overall, the group business maintained strong momentum, delivering both premium and fee growth. Individual protection was up $40 million, driven by premium growth as well as higher contribution from investment earnings.

Individual protection sales were up year-over-year, reflecting strong demand for par products. Earnings in surplus in Canada, was up from the prior year and drove increases across all business types, reflecting higher investment income and realized investment gains. Turning to Slide 12, U.S. underlying net income was $176 million, up $93 million from last year. Reported net income of $125 million was up $81 million year-over-year. Group Health and Protection underlying earnings were up $103 million, driven by good premium growth across all businesses, contribution from the DentaQuest acquisition and favorable experience. First quarter results were driven by strong underwriting performance in our stop-loss business and a significant moderation of pandemic-related mortality and disability experience in the group benefits business.

Sales in the U.S. were driven by strong momentum in dental and higher-margin products and employee benefits. Individual protection in the U.S. continues to generate good earnings and investment returns. First quarter results, however, were impacted by higher claim amounts. We’re pleased with the DentaQuest results this quarter. We are winning new business, are on track with our integration milestones and are confident that we will achieve our synergy targets. Slide 13 outlines Asia’s results for the quarter. Underlying net income of $141 million was up 4% year-over-year on a constant currency basis. Reported net income of $134 million was up 14%, including favorable market-related impacts. Wealth and Asset Management underlying earnings were down 29%, reflecting lower fee-based earnings from equity market declines.

Individual protection earnings, which comprise 85% to 90% of Asia’s earnings were up 7% in constant currency compared to the prior year. This was driven by higher premiums from good sales momentum and improved mortality experience in high net worth. Individual protection sales were up 25%, primarily driven by higher activity in Hong Kong with the lifting of border restrictions and continued momentum in the high net worth business. Overall, we’re off to a good start for 2023 amidst a challenging operating environment. This quarter continued to demonstrate the strength of Sun Life’s business model, including strong fundamentals and leadership positions in diverse global businesses. Good sales momentum reflecting our focus on client needs as well as diligent pricing and risk management.

Excellent balance sheet and capital positions and strong execution against our key business priorities to drive future growth. With that, I’ll turn the call back to Yaniv for our Q&A portion.

Yaniv Bitton: Thank you, Manjit. [Operator Instructions] I will now ask the operator to poll the participants.

Q&A Session

Operator: Thank you. [Operator Instructions] And our first question comes from Meny Grauman of Scotiabank. Your line is open.

Operator: Thank you. Our next question comes from Gabriel Dechaine with National Bank. Your line is open.

Operator: Thank you. Our next question comes from Doug Young with Desjardins. Your line is open.

Operator: Thank you. Our next question comes from Thomas MacKinnon with BMO Capital. Your line is open.

Operator: Yes, Paul Holden with CIBC. Your line is open.

Operator: Thank you. Our next question comes from Mario Mendonca with TD Securities. Your line is open.

Operator: Thank you. Our next question comes from Darko Mihelic with RBC Capital Markets. Your line is open.

Operator: Thank you. Our next question comes from Nigel D’Souza with Veritas Investment Research. Your line is open.

Operator: Thank you. Our next question comes from Joo Ho Kim with Credit Suisse. Your line is open.

Operator: Thank you. Our next question comes from Lemar Persaud with Cormark Securities. Your line is open.

Operator: Thank you. We have no further questions at this time. I will turn things to Mr. Bitton for closing remarks.

Yaniv Bitton: Thank you, operator. This concludes today’s call. A replay of the call will be available on the Investor Relations section of our website. Thank you and have a good day.

Operator: This concludes the program. You may now disconnect.