Sun Life Financial Inc. (NYSE:SLF) Q3 2023 Earnings Call Transcript

Sun Life Financial Inc. (NYSE:SLF) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, and welcome to the Sun Life Financial Q3 2023 Conference Call. My name is [ph]Dalem, and I’ll be your conference operator today. [Operator Instructions] The host of the call is David Garg, Senior Vice President, Capital Management and Investor Relations. Please go ahead, Mr. Garg.

David Garg: Thank you, and good morning, everyone. Welcome to Sun Life’s Earnings Call for the Third 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 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. 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 may be rendered inaccurate by subsequent events. And with that, I will now turn things over to Kevin.

Kevin Strain: Thanks, David, and good morning, everyone. Turning to Slide 4, we delivered good performance during the quarter, reflecting our diversified business mix, our focus on execution and the continued importance our clients put on health and financial security. We achieved solid underlying earnings for the quarter of $930 million, maintaining steady growth year-to-date. Our positive results this quarter are attributed to good performance in our Canadian group and Wealth businesses, higher fee-related earnings and asset management and favorable growth in Asia’s Individual Protection business. Sun Life Canada achieved strong earnings this quarter, up 15% from the prior year, driven by strong investment results and improved disability experience.

Sun Life Asia also had strong third quarter results driven by individual insurance sales, which were up 60% year-over-year. In Hong Kong, sales were four times higher than the prior year and over 50% higher than the previous quarter, supported by strong performance across our distribution channels. Earnings were down 19% from the prior year in our Sun Life U.S. business, largely due to lower dental results. This was driven by faster-than-expected state Medicaid redeterminations associated with the end of the public health emergency as well as continued investment in the Advantage Dental Plus business. Our total SLF assets under management now sit at $1.34 trillion, up 6% over last year. In our asset management pillar, MFS and SLC continue to perform well despite challenging market conditions.

SLC management fee-related earnings increased 17% driven by higher AUM, reflecting strong capital raising and deployment across the platform and the AAM acquisition. MFS maintained healthy margins. Net outflows were driven by industry conditions. On a year-to-date basis, defined contribution sales at MFS were up 14% compared to the prior year due to strong placement on consultant adviser and record-keeping platforms, driving approximately USD three billion in net inflows. We maintained an underlying ROE of 17.7% this quarter, approaching our medium-term financial objective of 18% plus, reflecting our disciplined capital management and sustained emphasis on capital-light businesses. Further, we maintain a strong capital position with a LICAT ratio of 147% for the quarter.

We also announced a $0.03 increase to our quarterly common share dividend, and we’re active on our share buyback program, demonstrating our commitment to returning capital to shareholders. Turning to Slide 5, two years ago, we introduced our client impact strategy focused on six key areas, including people and culture, financial discipline, digital leadership, distribution excellence, sustainability and a strong and trusted brand. All areas that we believe are critical to delivering on our purpose to help clients achieve life-confidence and security and live healthier lives. Over the past few months, we’ve refreshed our strategy to highlight our focus on trusted brand and our core values: caring, authentic, bold, inspiring and impactful, and we link sustainability to our culture.

Further, we sharpened the emphasis of our strategic imperatives to highlight the importance of deeper client relationships, thinking and acting more like a digital company, on leasing our talent and culture strategy and delivering value from our past M&A, all with the goal of realizing our ambition to be one of the best asset management and insurance companies in the world. Turning to Slide 6, we continue to execute on our client impact strategy as demonstrated by several key business initiatives delivered this quarter. Improving access to care and helping clients live healthier lives remains a top priority for us, and we are continuing to expand our health-oriented businesses in multiple markets. This quarter, we were selected to move forward in the final stages of contact negotiations with the government of Canada to be the administrator of the Canadian dental care plan, which will provide access to dental care for Canadians in need.

Through the plan, up to nine million additional Canadians will have access to dental care. We are excited for the opportunity to expand our role in Canada’s health ecosystem and to leverage the deep knowledge from our U.S. DentaQuest business to create a positive impact in our home market. In the U.S., we established a preferred partnership with OptiMed to make specialty drugs more accessible and affordable for our stop-loss members. The new program will improve how specialty drugs are administered for members while also managing rising health care costs. We are also continuing to make it easier for clients to access care and benefits through digital channels. In October, we completed the acquisition of Dialogue, Canada’s leading virtual health and wellness provider.

Dialogue provides access to quality, high-touch care to 50,000 organizations, representing nearly 2.8 million clients in Canada and internationally. Dialogue will play a key role in delivering on our purpose for clients. As an example, where Dialogue is having an impact beyond Canada, last week, we launched the Sun Life Health 360 app in the U.S., a digital front door to health and wellness support and resources for stop-loss members, including direct access to health navigator powered by Pinnacle Care advisers. The app was developed by Dialogue in collaboration with the U.S. and offers our U.S. members the chance to enable access to valuable tools to manage and improve their health. In Asia, we increased our strategic investments in Bowtie, Hong Kong’s first virtual insurer with a leading market share of approximately 30% in Hong Kong’s direct sales channel.

Together, Sun Life and Bowtie are committed to making insurance affordable and accessible in our Asia markets. Across the organization, we are doing more to think and act like a digital company. One example of this is that we are experimenting with several generative AI projects, including in our contact centers, and we were one of the first to pilot Amazon Bedrock on AWS. We are focused on opportunities to enhance our client impact through technologies like GenAI. We’re expanding our distribution capabilities through strategic partnerships and investments to deepen our impact. This quarter marked the start of our 15-year exclusive Bancassurance partnership with Dah Sing Bank in Hong Kong, which had a strong start from a sales perspective. In October, SLC Management entered into a strategic partnership with Scotia Bank to distribute our alternative investment capabilities to the Canadian retail market through Scotia Global Wealth Management.

Through this partnership, Canadian high-net-worth investors will gain access to our world-class alternative investment capabilities. This strategic partnership, coupled with our recent acquisition of Advisor Asset Management, or AAM, positions us well to meet the growing demand for alternatives — alternative assets through high net worth investors. We continue to strengthen distribution across Sun Life, our affiliates and strategic partnerships to meet the investment needs of our clients. We also continue to support the communities in which we operate. In Canada, we expanded our partnership with Spirit North, a national charitable organization, committing $1 million in funding over three years to deliver physical health programs and address health and equities in underserved indigenous communities.

We know this partnership will not only make a positive impact on the physical health of youth, but also have a tremendous impact on their emotional and mental health too. The quarter SLC management provided another round of funding against its $110 million commitment to support 24 First Nation communities with connections to the provincial and electricity grid to improve the quality of life of the residents and eliminate thousands of tons of annual greenhouse gas emissions. Finally, I want to discuss a new role we have recently created. Over the past few years, we’ve seen the success and importance of strategic partnerships on business growth and on delivering on our purpose. We are also seeing more opportunities to leverage partnerships for all of our business lines globally.

To that end, we’ve created the new role of Vice Chair of Strategic Partnerships reporting to me to leverage the global partnerships opportunities that are in front of us. I have asked Ingrid Johnson to take on this role. Ingrid’s wealth of experience in global relationships — in her relationship management skills, her work in supporting several Asia strategic partnerships, combined with her many years of P&L leadership makes her an ideal leader to take on this executive role. In the interim, Chris Way, Manjit and I, along with Ingrid’s support, will provide guidance and leadership to our team in Asia as I conduct a search for the new President of Asia, which I expect to announce over the next month or so. Despite a challenging external environment, our diversified mix of business continues to perform well, driven by our strategy and our people and culture.

We remain focused on our purpose and executing our strategy, and this focus has served us well as we delivered positive results in the quarter. With that, I’ll now turn the call over to Manjit.

Manjit Singh: Thank you, Kevin, and good morning, everyone. Let’s begin on Slide 8, which provides an overview of our third quarter results. We are pleased with our business results this quarter. Underlying net income of $930 million and underlying earnings per share of $1.59 were in line with prior year results, excluding the impact from the sale of the U.K. business. Underlying ROE of 17.7% was strong, underpinned by our diverse and attractive businesses in Wealth and Asset Management, Group Health and Protection and Individual Protection. Wealth and Asset Management underlying earnings comprised 44% of total Q3 underlying earnings and were up 9% from the prior year. This was driven by higher investment income, reflecting volume growth and higher yields as well as an increase in fee-related earnings in our Asset Management businesses.

Group Health and Protection businesses comprised 27% of Q3 underlying earnings and grew 1% year-over-year. Strong revenue growth across all group businesses and better disability experience in Canada was largely offset by less favorable experience in the U.S. Individual protection earnings comprised 29% of underlying earnings and declined 3% year-over-year, driven by the sale of our U.K. business and lower investment results in the U.S., largely offset by strong business growth in Asia. New business CSM of $370 million more than doubled from the prior year, reflecting strong sales results in Hong Kong, International High Net Worth and Canada. Total CSM grew 11% year-over-year, primarily driven by organic CSM growth, reflecting strong sales results.

Reported net income for the quarter was $871 million, up from $111 million in the prior year. The difference between underlying and reported earnings this quarter of $59 million largely reflects the top-up in the SLC foot liability, DentaQuest integration costs and amortization of intangibles, partially offset by favorable market-related impacts and positive ACMA. he favorable market-related impact was primarily driven by interest rates, partially offset by unfavorable real estate experience. The favorable impact from interest rates this quarter was largely due to a less inverted yield curve. As we discussed last quarter, given our current positioning as the yield curve normalizes, we expect to see favorable industry-related market impacts in reported net income.

Real estate experience reflects a relatively fat return in the current quarter versus our long-term expectations of approximately 2% per quarter. We are long-term investors in real estate and continue to view this asset class as a key component of our diversified investment portfolio. Over the last 10 years, our North American real estate portfolio has generated annualized total returns of over 9%, well above our current long-term expectations. In Q3, we also conducted our annual actuarial view of assumptions and method changes. This review resulted in relatively neutral impacts of positive $35 million to reported net income and negative $43 million pre-tax to CSM. Our balance sheet and capital position remains strong. This provides us with financial flexibility to execute on attractive business opportunities and resilience to absorb potential impacts for volatile market conditions.

SLF LICAT of 147% declined one point from the prior quarter as strong organic capital generation was offset by capital deployment. Capital deployments in the quarter led to a four-point decline in LICAT, driven by net sub debt redemption of $500 million, repurchase of 2.8 million shares and the close of the Dah Sing Bank, Bansurance agreement. Holdco cash remained strong at $1.4 billion, and our leverage ratio remains low at 22%. We continue to expect strong capital generation of 25% to 30% of underlying earnings over the medium term after payment of common share dividends and investments in organic business growth. Now, let’s turn to our business group performance starting on Slide 10 with MFS. MFS underlying net income of USD 207 million was down 2% from the prior year as an increase in variable compensation was partially offset by higher ANA and increased investment income.

Reported net income of USD 212 million was down 12% year-over-year, driven by the fair value change in shares owned by MFS management. AUM of $556 billion was down 6% from the prior quarter driven by declines in global equity markets and net outflows. And pre-tax net operating margin of 41% was in line with the prior year. Retail net outflows were USD 3.7 billion in institutional and institutional outflows were $5.6 billion, driven by the continued impact of higher interest rates and active management flows. MFS continues to outperform its peers with lower relative net outflows. Turning to Slide 11, SLC Management generated fee-related earnings of $68 million, up 17% — year. The increase reflects good capital raising and deployment of capital to fee-earning AUM over the past year as well as the AAM acquisition.

Underlying net income of $53 million was up $25 million — was up from $25 million last year, driven by higher fee-related earnings, a lower tax rate and the non-recurrence of onetime expenses. Reported net loss at SLC Management was $16 million, primarily driven by an increase in the liabilities to buy up the remaining ownership in SLC affiliates. We undertake a detailed review of the estimated liabilities in the third quarter of the year, and this quarter’s results reflect a top up of $42 million. Capital raising of $3.2 billion increased over the prior quarter, driven by strong demand for public — SLC fixed income and for real estate debt at BGO. Total AUM of $219 billion was up 5% 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 12, Canada, underlying net income of $338 million was driven by strong disability experience and higher investment income. Reported net income of $365 million was up year-over-year due to favorable market-related impacts. Wealth and Asset Management underlying earnings were up 14% on increased investment income from higher volumes and yield. Group Health and protection underlying earnings increased 33% driven by favorable disability experience reflecting higher margins and lower claims as we continue to realize the benefits of our management and pricing actions. Individual protection was modestly lower year-over-year on lower investment contribution.

Both group and individual businesses posted strong sales growth. Group sales were up 4% in higher health sales, while individual sales were up 24% due to higher par life sales. Turning to Slide 13. U.S. underlying net income of USD 140 million was down 19% from last year while reported net income of USD 105 million was up 9% year-over-year. Group Health and Protection underlying earnings were down year-over-year as strong revenue growth was more than offset by less favorable experience. Dental results this quarter included the impact from Medicaid redeterminations and start-up costs from the expansion of Advantage Dental plus practices. The entry has anticipated the wind-down of the public health emergency that was established during COVID and the related impact of Medicaid redeterminations.

While the pace of rollout some new — have been faster than our assumptions, we expect the total impact on membership and revenues remain largely in line with our expectations. For Q3, this led to lower volumes and higher loss and expense ratios. Looking forward, we expect the incremental revenues from our sales pipeline to more than offset the impact of the Medicaid redetermination process. Therefore, we expect good revenue growth in 2024. We remain very pleased with the performance of the DentaQuest acquisition. We are a leading player in the industry, have strong business momentum are on track with our integration milestones and are confident that we will achieve our synergy targets. The group benefits business had strong revenue growth driven by solid premium growth, higher fee income and good margins.

This is offset by less favorable morbidity experience. U.S. morbidity experience in the quarter remained favorable, reflecting strong group disability and stop loss results, partially offset by unfavorable dental experience. Individual protection results declined year-over-year, reflecting investment contributions — reflecting lower investment contributions this quarter. U.S. group sales of $179 million were down 36% year-over-year, reflecting lower dental Medicaid sales, which are lumpy in nature as they are linked to the timing of government contracts, partially offset by higher commercial dental sales. Slide 14 outlines Asia’s results for the quarter. Underlying net income of $166 million was up 7% year-over-year on a constant currency basis.

Reported net income of $211 million was well above underlying income, largely reflecting favorable interest-related market impacts and positive ACMA. New business CSM for Asia was very strong at $238 million, up 193% from the prior year. Individual Protection earnings were up 25% year-over-year on a constant currency basis reflecting business growth from strong sales over the past year, improved mortality and contributions from our joint ventures. Individual protection sales were up 57%, primarily driven by strong sales growth in Hong Kong and high net worth. Hong Kong sales also benefited from the strong start of our bancassurance agreement with Dah Sing. In closing, we are pleased with the results this quarter. We maintained strong sales momentum in individual protection.

We generated very strong new business CSM and total CSM is up 11% year-over-year. Group results in both Canada and the U.S. continue to benefit from our leading capabilities and proactive management actions, which drove favorable experience. Our Asset Management businesses continue to deliver good long-term investment performance and are well positioned for growth as markets normalize. Our capital position is strong, and we continue to generate peer-leading ROE. With that, I’ll turn the call back to David for Q&A.

David Garg: Thank you, Manjit. 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 with any additional questions. I will now ask the operator to pull the participants.

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Q&A Session

Operator: Thank you, Sir. [Operator Instructions] And I show our first question comes from the line of Tom MacKinnon from BMO Capital. Please go ahead.

Tom MacKinnon: Yeah, thanks very much. Good morning. First question is just with respect to the LICAT being better than anticipated, and you mentioned four points that would have heard it from net debt and some other deployments, buybacks — same thing. So if — but the LICAT was actually only down one point quarter-over-quarter. So are we to sort of infer that there could have been at least you mentioned strong capital generation, does it look like it’s probably in the area of three points or so of capital — LICAT capital that was attributable to capital being generated in the quarter? And if so, it seems to be a little bit better than your 25% to 30% kind of medium-term target? And I have a follow-up.

Manjit Singh: Tom, it’s Manjit. You’re right. As I mentioned in my prepared remarks, our general view is that over the medium term, we expect to generate 25% to 30% of underlying earnings as organic capital. And that really reflects the portfolio of attractive capitalized businesses that we’ve built over time. Now that amount will bump around quarter-over-quarter depending on things like new levels of business and as well as market conditions. And you’re correct, for this — for the current quarter, we had about three LICAT points or approximately $600 million of organic capital generation in the quarter, and that was above our target that I mentioned previously. And that was really driven by good underlying earnings in Group Health and Protection, Asia individual protection, solid asset management earnings as well as strong new business CSM. So overall, we feel very good about the capital generation this quarter.

Tom MacKinnon: And that $600 million is before payment of the common dividend, correct then?

Manjit Singh: Correct, yes.

Tom MacKinnon: Yes. Okay. And then just as a follow-up for Kevin. I think you — in your prepared remarks, Kevin, you mentioned the changes in management with respect to Ingrid’s responsibilities. Did I hear that correctly? And I’m just wondering, Asia is on fire here in terms of some of your great sales and CSM growth and why make a change in management there?

Kevin Strain: You did hear it correctly. And Tom, we increasingly see partnerships being an important part of what we’re trying to do globally and creating those connections, and Ingrid is well suited for that. Asia is on fire, and our intention is to keep it on fire and to keep it moving in the right direction. You would have seen that — I mentioned that Chris, Manjit and I will be leaning into Asia over the next few weeks as we get ready to appoint the successor to Ingrid there. Chris is based in Singapore. So he’s going to be looking after the Asian countries. He also sits on our joint venture Board in China. So he’s going to be leading into China. Manjit is on our Joint Venture Board in India and taking responsibility for India in the interim.

And then I’m — as you know, I spent many years in Asia, not just running Asia, but as CFO and now as CEO, and I’ll be leading into our hubs business, which is Hong Kong, Singapore, Bermuda as well as the regional office, and we’re working with Ingrid on that. So I don’t think that this is going to slow us down at all. And in fact, it’s about accelerating the company’s growth through global partnerships, but also in Asia.

Manjit Singh: Sorry, Tom, just on your previous question, the $600 million was net of dividends, just to confirm that.

Tom MacKinnon: Yes. Yes, that’s right. Yes, correct. Yes. So if we want to look at before payment of the dividend, it would have been higher, I assume then.

Manjit Singh: Correct. Exactly right.

Tom MacKinnon: Okay. Great. And then sorry, just — is the look internal or external in terms of someone to take over [indiscernible]

Kevin Strain: Yes. For all of our senior roles, we do succession planning, and we have a list of both internal and external candidates. And as I said, I expect to have an announcement in the next month or so. There is an advantage to Asia from an internal candidate because knowing Sun Life and understanding our footprint and understanding Asia, is an advantage, but we always look at both internal and external and try to attract the best candidate. You should hear from us in about a month or so.

Operator: Thank you. And I show our next question comes from the line of Gabriel Dechaine from National Bank Financial. Please go ahead.

Gabriel Dechaine: Good morning. I wanted to revisit this dental or the redeterminations of Medicaid recipients. And you said a couple of things. One, that the roll-off is taking place at a faster pace than you expected? And two, as that’s happening, it’s causing higher expenses, I guess, as you’re processing those or something? Maybe delve into a bit more of what’s behind that. And why you think things will maybe stabilize or get better? Because I’m just looking at the sales number, you averaging over $100 million over the past four quarters and that just fell off a cliff to $4 million. I’m wondering how that’s expected to rebound and what the next few quarters could look like for profitability in this business if you can?

Daniel Fishbein: Sure. It’s Dan. Let me kind of walk through the whole story of the redeterminations with the end of the public health emergency. And just as a reminder, during COVID, the federal government instituted a public health emergency and one of the impacts of that was that people could not be dis-enrolled from Medicaid during that period of time. The public health emergency ended on May 11, and that freed up the date who have the responsibility for enrollment to recertify or re-determine who is eligible. We and most of the industry have estimated about 12% of existing Medicaid membership would roll off as a result of that process over a 24-month period. Our latest estimate, which is consistent with industry estimates is for about 13.5% of membership to roll off, so pretty close to that original, but at a much faster pace, roughly over a 12- or 13-month period.

In fact, we think the — will be complete or largely complete by June one of next year. So it’s largely the acceleration that has been the difference here. And so far, as of October, about half of those redeterminations we believe, have occurred. So we’re about halfway through that process. But we have about three more quarters where that will be happening.

Gabriel Dechaine: No, no, no. I got my second question. I got to hold off on that. But I…