Sun Life Financial Inc. (NYSE:SLF) Q4 2023 Earnings Call Transcript

Sun Life Financial Inc. (NYSE:SLF) Q4 2023 Earnings Call Transcript February 8, 2024

Sun Life Financial Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to the Sun Life Financial Q4 2023 Conference Call. My name is Shree, 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 Fourth 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. 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 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 strong performance during the fourth quarter, contributing to strong full year results for 2023. Our results show the strength and resilience of our business mix and the positive impact we’re having on our clients. We achieved strong underlying earnings for the quarter of $983 million, up 10% year-over-year. Our strong results were broad-based with strength in Canada, U.S. and SLC management. Underlying ROE of 18.4% this quarter is above our medium-term financial objective of 18% plus, reflecting our strong earnings and disciplined financial management. Further, we maintained a strong capital position with an SLF LICAT ratio of 149%. Our results reflect exceptional individual protection sales and good momentum in our group health and protection businesses in the fourth quarter.

Strong group health and protection sales were driven by both our Canadian and U.S. Group businesses. In Canada, sales were up 63% year-over-year, largely due to higher large case sales and in the U.S., both Dental and Health and Risk Solutions sales were strong. This quarter, DentaQuest was awarded two new Medicaid dental benefits contracts in two states and commercial dental sales increased 55% over the prior year. The dental business has recorded more than US$ 650 million in sales since the closing of the DentaQuest acquisition on June 1, 2022. Individual protection sales were driven by strong performance in Asia, with sales up 49% year-over-year. International high net worth sales were 2x higher than the prior year and Hong Kong sales were 4x higher.

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Q&A Session

Our Hong Kong sales growth reflected our diversified mix of high-performing quality-focused distribution channels, including our broadened broker network and new agency teams focused on Mainland Chinese individuals and our bancassurance partnership with Dah Sing Bank. Canadian individual protection sales were up 23% year-over-year, driven by higher third-party sales. Wealth sales and asset management gross flows were up in the quarter with the Canadian business up 32% due to higher individual wealth and defined benefit sales. SLC demonstrated strong capital raising, closing the year with $177 billion in fee-earning AUM, up 8% over the prior year. SLC also won the 2023 CIOs Industry Innovation Awards for Private Credit. MFS experienced outflows primarily driven by industry conditions.

During the year, MFS became the 9th largest fund group for the U.S. retail mutual fund industry based on AUM. And next month, MFS celebrates their 100th anniversary. Congratulations to Michael Roberge and our colleagues at MFS on this milestone. Keeping with MFS, I want to recognize their recent leadership announcement with Michael Roberge set to become Executive Chair of MFS on January 1, 2025, and Ted Maloney to take on the role as their CEO. Ken has been with MFS for almost 20 years and is currently their Chief Investment Officer. Congratulations to both Mike and Ted. Turning to Slide 5. Our full year 2023 results were driven by similar factors as seen during the fourth quarter. Underlying net income increased 11% to $3.7 billion, supported by growth across all businesses.

Underlying ROE of 17.8% was also strong. Total assets under management reached $1.4 trillion in 2023, demonstrating the resilience of our business in a challenging environment. Turning to Slide 6. This quarter, we delivered on several key business initiatives that help drive our client impact strategy forward. Providing access to care and helping clients live healthier lives remains a top priority. We remain a leader in health benefits and services in Canada and the U.S. and are increasingly leveraging digital partnerships to support our clients’ health journeys. This quarter, we finalized a contract with the Government of Canada to be the administrator of the Canadian dental care plan, which will provide access to dental care for up to 9 million additional Canadians.

We also completed the acquisition of Dialogue, Canada’s premier virtual health care and wellness platform. And finally, in Canada, we completed a minority investment in Pillway, a virtual pharmacy offering increased choice and convenience for our clients. In the U.S., we successfully launched a pilot of Sun Life Health 360, an app built using Dialogue’s flexible digital engagement platform as a front door to health and wellness support. It’s an example of how we are leveraging our strategic capabilities across markets to create value for our clients and advancing how we think and act more like a digital company. Through this pilot, over 63,000 members now have access to Sun Life Health 360, bridging the gap in accessing care and helping facilitate better health outcomes.

We’re continuing to roll out the platform to more members and further enhancing the app by enabling access to programs focused on kidney, joint and muscle condition, among others. We continue to expand our distribution capabilities and product suite to support our clients in achieving life confidential security. During the quarter, we formed a securities investment dealer, Sun Life Canada Securities, having received regulatory approval from the Canadian investment regulatory organization. We anticipate an operational launch later this year. Our expanded offerings in Sun Life Canada Securities will broaden access to wealth solutions to help clients achieve lifetime financial security. SLC Management recently announced a strategic relationship with Scotiabank to distribute our alternative investment products to the Canadian retail market through Scotia Global Wealth Management.

This relationship will provide Canadian high net worth investors with access to our world-class alternative investment capabilities. In Singapore, we launched a new indexed universal life product, providing high net worth clients a dynamic balance between long-term protection and growth and the flexibility to customize premium payments and investment allocations. This product has been well received by the market. We’re doing more to think and act like a digital company, harnessing the power of generative AI. We’re testing and learning with several Gen AI experiments across the organization, balancing innovation while managing risk. This quarter, we launched a new Gen AI-powered tool that helps developers write and test code more efficiently.

The tool was launched to over 2,000 employees, and we’re seeing productivity gains from the first group of adopters enabling delivery of new digital experiences for our clients. In the U.S., Gen AI is helping improve productivity in our call centers by analyzing and summarizing calls and delivering insights on clients’ top concerns. We’re excited about the potential Gen AI has to help create more exceptional client experiences and improve workplace productivity. Finally, we continue to be recognized for our progress in sustainability and our inclusive culture. Sun Life was recognized by Corporate Knights as being among the Global 100 most sustainable corporations in the world for the 15th consecutive year and the 6th consecutive year as the top bank insurance company in North America.

Additionally, Sun Life received numerous employer recognitions in 2023, including being certified as a great place to work in several key markets. SLC Management was also named 2023 Best Places to Work in Money Management for the fourth year in a row by pensions and investments. We are pleased to receive these recognitions as they reflect our inclusive culture and our commitment to our people. Turning to Slide 7. We remain confident in the resilience of our strategy and our ability to execute on our strategy. In 2024, we’ll be focused on taking the next step in our digital development, advancing how we think and act like a digital company. This means building on the strong foundation we have built over the last four years under our digital enterprise program, where we have been modernizing our tech stack and building our agile working model.

2024 will see us continue to evolve towards thinking and acting more like a digital company, including building out new apps and new features on existing apps to support our clients’ financial security and healthy living. We will also continue to look for and execute on synergies between asset management and insurance, building on the strong capabilities at SLC and MFS. We have built a strong health business in Canada and the U.S., and we’ll continue to deepen and impact we have on client health, and we will accelerate our momentum in Asia, focusing on building quality distribution and strong execution. Finally, we will continue to evolve our culture towards bolder thinking, driving a bias to action and delivering on results. In closing, I’d like to wish our Asian colleagues around the world good health, happiness and prosperity as they celebrate Lunar New Year over the next few days and welcome the year of the Dragon.

Kung Hei Fat Choi. Gong Xi Fa Cai, Chuc Mung Nam Moi for all of those that are celebrating their new year. I’d also like to recognize Black History Month, where we’re celebrating the outstanding contributions and achievements of black individuals who have made a positive impact in our communities. It’s important to continue to build a more inclusive culture for everyone. And I’d like to share a final note that this will be Manjit’s last call as our Chief Financial Officer. As you all know, Manjit will be taking on the role of President of our Asia business starting in March. Manjit on behalf of all Sun Life’s congratulations on your new appointment. We’re looking forward to working with you in your new capacity and continue to see great things coming out of Sun Life Asia.

And with that, I will turn the call over to Manjit, who will walk us through the fourth quarter financial results.

Manjit Singh: Thank you, Kevin, and good morning, everyone. Let’s begin on Slide 9, which provides an overview of our fourth quarter results. We delivered strong results this quarter as underlying net income of $983 million and underlying earnings per share of $1.68 were up 10% and 11%, respectively. This was driven by strong performance in U.S. and Canada as well as resilient asset management earnings. We are pleased that our underlying ROE of 18.4% cross the 18% mark this quarter. Our peer-leading ROE is driven by our attractive mix of businesses across wealth and asset management, group health and protection and individual protection. Wealth and Asset Management comprised 40% of our Q4 underlying earnings and were up 7% from the prior year.

This was driven by higher asset management fee-related earnings and higher investment income, reflecting volume growth and increased yields. Group Health and Protection businesses comprised 40%, 34% of underlying earnings and grew 14% year-over-year. Results were driven by good sales growth, improved disability experience and higher investment contribution, partially offset by lower dental earnings. Individual protection comprised 26% of underlying earnings and increased 23% from last year. This was driven by business growth and higher investment earnings, partially offset by the sale of the Sun Life U.K. business. New business CSM of $381 million was up 51% from the prior year, reflecting strong sales in Asia and Canada. For the full year, we added over $1 billion of new business CSM.

Reported net income for the quarter was $749 million, $234 million lower than underlying earnings. The difference between underlying and reported net income was driven by acquisition-related costs, amortization of intangibles and unfavorable market-related impacts. Market-related impacts were primarily driven by negative interest rate experience, reflecting lower rates and unfavorable real estate experience. Real estate experience reflects modestly negative total returns in the current quarter versus our long-term expectations of approximately 2%. We are long-term investors and continue to view real estate 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 in excess of our current long-term assumptions.