Sun Life Financial Inc. Q3 FY2024 earnings call

Management Statement and Operational Highlights

• Profitability: EPS $1.76, up 11%, ahead of medium-term objective; underlying and reported earnings exceeded $1 billion. ROE 17.9% in line with medium-term objective; LICAT ratio 152%.
• Dividends and Share Buybacks: Increased quarterly common share dividend; bought back $146 million of common shares.
• AUM: AUM reached $1.5 trillion, Canada's largest manager by AUM.
• Strategic Imperatives: Focus on leveraging asset management, extending wealth presence, accelerating Asia momentum, deepening client health journey, and operating as a digital company.
• Operational Highlights: MFS strong earnings and AUM growth; SLC acquired InfraRed Capital Partners; Canada launched MyRetirement Income; Sun Life US became largest dental benefits provider; digital innovation with Gen AI chatbot and Philippines automated underwriting platform; Canada Order of Excellence award.

Segment Performance

• Wealth and Asset Management: 42% of Q3 underlying earnings, up 4% year-over-year due to higher fee income from increased asset levels. AUM at $645 billion, up 16% year-over-year but with $14 billion in outflows.
• Group Health and Protection: 31% of underlying earnings, up 21% year-over-year driven by strong business growth in Canada and US.
• Individual Protection: 27% of underlying earnings, up 3% year-over-year, driven by Asia and Canada but partially offset by unfavorable mortality in Asia last year.
• MFS: AUM reached $645 billion, up 16% year-over-year, with $14 billion in outflows including institutional redemptions and retail preference for high-growth tech stocks. 97% of fund assets ranked in top half of Morningstar categories for 10-year performance.
• SLC Management: Underlying net income $47 million, down 11% year-over-year; fee-related earnings up 6% year-over-year; capital raising $7.1 billion, up $3.9 billion year-over-year; total AUM CAD 230 billion, up $11 billion year-over-year.
• Canada: Underlying net income $375 million, up 11% year-over-year; wealth AUM $185 billion, a record high; Group Health and Protection up 26% year-over-year; Individual Protection up 19% year-over-year but sales down 24% year-over-year.
• Sun Life US: Underlying net income $161 million, up 15% year-over-year; Group Health and Protection up 13% year-over-year; Dental facing Medicaid redeterminations but sales growing in commercial.
• Asia: Underlying net income $170 million, up 1% year-over-year; strong protection sales, record wealth earnings in India and Hong Kong.

Guidance

• US Dental: Target $100 million in earnings by 2025.
• SLC: Aim for $235 million underlying net income by 2025.
• Organic Capital Generation: Target 25%-35% of earnings.
• Dividend and Buybacks: Continue returning capital to shareholders via dividends and share buybacks.
• M&A: Consider M&A for growth, though cautious given past acquisition challenges.

Risks

• Credit Experience: Occasional credit loss spikes, particularly in private fixed income.
• Dental Medicaid: Seasonality and redeterminations impacting membership and results.
• MFS Outflows: Institutional outflows due to specific mandates and market preferences, though expected to moderate.
• Expense Volatility: Quarter-to-quarter volatility in expenses, especially in corporate segment.
• SLC Affiliate Timing: Uncertainties in timing of affiliate payments affecting liability valuations.

Question and Answer

• **Q: John Aiken on retroactive premiums in dental.

A: Dan Fishbein noted retroactive premium was for past year, with proactive premium adjustments ongoing and large state contracts effective 9/1 and 10/1 of current year.

• **Q: Thomas MacKinnon on credit and capital.

A: Randy Brown explained credit losses are episodic, with private fixed income book highly diversified; LICAT ratio 152% with strong capital generation, prioritizing dividend, M&A, and share buybacks.

• **Q: Meny Grauman on expenses.

A: Tim Deacon said 40% of $200 million efficiency target met in 2024, with bulk of savings in 2024 and 80% by end of 2025, noting volatility in Q4 expenses.

• **Q: Gabriel Dechaine on SLC and stop-loss.

A: Steve Peacher and Tim Deacon discussed SLC's liability valuations and stop-loss experience, emphasizing responsible pricing and recovery of utilization.

• **Q: Alex Scott on MFS outflows.

A: Mike Roberge and Ted Maloney noted institutional outflows in MFS due to specific strategies, expected to moderate with market changes and fixed income momentum.

• **Q: Doug Young on Asia and dental pricing.

A: Dan Fishbein and Tim Deacon discussed dental pricing progress (91% of contracts repriced) and Asia investments driving earnings growth.

• **Q: Mario Mendonca on MFS M&A and ROE.

A: Kevin Strain and Mike Roberge stated MFS growth via organic means preferred, with ROE driven by business mix and resilience.

• **Q: Paul Holden on organic capital generation.

A: Tim Deacon explained organic capital generation target 25%-35%, elevated recently due to strong sales.

• **Q: Lemar Prasad on retroactive premium and MFS margins.

A: Dan Fishbein and Mike Roberge discussed retroactive premium impact and MFS margins remaining strong with operating leverage.