Sun Life Financial Inc. (NYSE:SLF) Q4 2022 Earnings Call Transcript

Sun Life Financial Inc. (NYSE:SLF) Q4 2022 Earnings Call Transcript February 9, 2023

Operator: Good morning, and welcome to the Sun Life Financial Q4 2022 Conference Call. My name is Michelle, and I’ll be your conference operator today. 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 Fourth Quarter of 2022. Our earnings release and the slides for today’s call are available on the Investor Relations section of our website at Sun Life.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. 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’ll now turn things over to Kevin.

Kevin Strain: Thanks, Yaniv, and good morning to everybody on the call. Turning to Slide 4. Sun Life delivered strong performance during the fourth quarter, contributing to solid 2022 full year results. Our results demonstrate the resilience of our diversified business model and the commitment of our people to deliver strong earnings and continued growth in the midst of challenging environment while meeting our commitments to clients and delivering on our purpose. We’ve made tremendous progress on our business strategy by driving positive client impact for our 85 million clients around the world. We achieve strong underlying earnings this quarter of $990 million Canadian representing 10% growth over prior year demonstrating the resilience of our business mix.

Our growth was driven by strong results from our protection and help businesses. Sun Life U.S. us had a strong fourth quarter underlying earnings as a result of solid underwriting performance in health and risk solutions, significant moderation of COVID related impacts and contributions from DentaQuest. In Asia, we saw a breakthrough in earnings profitability in Vietnam driven by the addition of a scale in bank insurance and in agency and we saw higher margins in our international high net worth business. Strong results from our protection and health business were partially offset by lower income and increased outflows from our wealth and asset management businesses, largely reflecting declines in global equity markets. Underlying ROE for the quarter up 15.7% continues to trend towards our medium term objective of 16% plus, reflecting our disciplined capital management and growing emphasis on capital Life businesses, and our LICAT ratios at SLF remain solid at 130% for the quarter.

Turning to slide 5, our full year 2022 results were driven by similar factors as seen during the fourth quarter. Underlying net income increased 4% to $3.7 billion supported by growth in our health and protection businesses. Underlying ROE for the year was 15.1% was also strong. Over the past year, we increased our quarterly dividend by 31%, following the lifting of restrictions in November of 2021. Turning to slide 6. This quarter, we delivered on several key business initiatives that help drive forward our client impact strategy. The strengthening of our distribution capabilities in growth markets has been a priority for Sun Life in 2022. In Sun Life Asia, we remain focused on building quality distribution channels. We realized a step change in our bank insurance distribution over the last 12 months, driven by new marquee relationships and executing on our existing partnerships.

Last month we announced our first exclusive bank insurance partnership in Hong Kong with Dah Sing’s bank under the 15 year agreement Sun Life will be the exclusive provider of life insurance solutions to Dah Sing’s retail banking customers with distribution of Sun Life products expected to start this summer. This rounds out our distribution capabilities in Hong Kong and positions us well to compete. With the addition of this bank insurance partnership in Hong Kong, we now have more than 20 quality bank insurance partnerships in seven markets across Asia. Our history of execution in Asia has proven that strong bank insurance distribution, coupled with high quality advisor channels provides a critical platform for growth. One example of this is how we’re building our business in Vietnam, executing on transformational bank insurance partnerships, with a focus on providing high quality insurance and wealth products and services to fit our client’s needs.

We are now one of the fastest growing life insurance players in Vietnam. We’ve improved our market position for insurance sales from 15 position in the full year 2020 to six position in 2022. At SLC management, we also recently closed our acquisition of a majority stake in advisor asset management. Advisor asset management or AAM adds distribution capabilities in the U.S. High Net Worth retail market, one of the fastest growing distribution channels for alternative assets. We’re excited to welcome AMM, the AAM team to our SLC team. We’re increasingly delivering positive client impact by elevating our focus on health, helping clients access health care and coverage and the coverage they need. In the U.S., DentaQuest continues to expand its dental business, advancing our goal to increase access to oral health care in underserved communities.

In Q4, DentaQuest, expanded its advantage Dental Plus care practices, with four new offices in Florida. These practices went from startup to it add capacity in 90 days, which demonstrates the need for these services. DentaQuest also had a strong quarter for contracts awarded, including two new dental managed care contracts from a multi state health plan provider. The two newest contract expand DentaQuest partnership with the health plan to 10 states. That’s a question unique capabilities continue to contribute to our ability to win and retain state business while also driving higher margins. Additionally, the COVID-19 pandemic has exasperated the mental health crisis in Canada. We know many people are at a breaking point and we need to offer more resources and more access to tackle this crisis.

We know the workplace is an important place to address these concerns. And we’re doing our part in Canada by providing clients with better access to mental health solutions. We’re also doing our part in our communities. And last month we announced an investment to support mental health programs for at risk marginalized youth across Canada, continuing to build capabilities that will expand access to care, will support Canadians with early prevention and with faster recovery. We continue to make great strides in our digital journey. Tied to our commitment of increasing financial security we continue to work hard to build the capabilities such that our clients can access our spectrum advisory options through a frictionless digital experience. Sun Life Canada has created more than 65,000 financial roadmaps for Canadian clients in 2022 using our Sun Life One Plan digital tool.

Sun Life One Plan contributes to our goal for all Canadians to have a financial plan. Finally, we continue to be recognized for our progress in sustainability and our inclusive culture. Sun Life was recognized by Corporate Knight as being among the global 100 most sustainable corporations in the world for the 14th consecutive year. And this year, we were the top ranked insurance company globally. Additionally, Sun Life received many employee awards in 2022, including being certified as a great place to work in several of our markets. This is especially gratifying because it’s the result of direct feedback from our employees. This is recognition of our focus on ensuring we have an environment where diversity is championed in addition to offering resources and flexibility to support mental, physical and professional wellbeing.

Before turning to Manjit to detail our Q4 financial results, I’d like to share a few final thoughts. First, I’m excited to welcome Tom Murphy, our new Chief Risk Officer to the Sun Life executive team. Some of you will know Tom from his time with FLC management, where he headed up our fixed income and institutional business. Tom brings a global depth of knowledge and experience particularly in asset management and the pension space which will be a tremendous benefit for all of us. I’d also like to recognize Colin Frame. Many of you on the phone will know him from his time as the Sun Life CFO and then as our chief risk officer. Colin will retire on May 1 after an illustrious 20 year career with Sun Life. He has played a significant role in our company’s growth over the past two decades.

On behalf of everyone at Sun Life, I want to thank Colin for his service to Sun Life and wish him well in his retirement. And lastly, I’d like to share a few thoughts on the year ahead. While we expect the environment to remain challenging, we are optimistic about the outlook. Based on recent direction of travel for inflation in North America we’re seeing most economists forecasting a plateau of interest rates in the back half of 2023 with some soaring reductions in interest rates in 2024. We expect some volatility and rates will persist. But this will likely be within a tighter range. While inflation looks to be moderating we continue to watch the environment including geopolitical uncertainty, additional socks the energy supply, the reopening of markets in Asia, and COVID-19.

We continue to feel prepared as a result of a resilient client impact strategy supported by our diversifying and capital Life business mix. Recent investments across growing spaces and health, asset management and Asia and our sustained commitment to delivering on our purpose to help clients achieve lifetime financial security and live healthier lives will all support us next year. With that I will now 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 8, which provides an overview of our Q4 results. Sun Life had a strong finish to the year with record underlying earnings in the fourth quarter, reflecting the strength of our businesses and the benefits of our diversified mix. Underlying net income of 990 million and underlying earnings per share of $1.69 were up 10% from the prior year. Strong results and protection health businesses were underpinned by business growth, the contribution from the DentaQuest acquisition, higher margins in the U.S. and Canada and moderating COVID related impacts. This was partially offset by lower wealth and asset management results, which were impacted by global equity market declines.

Reported net income for the quarter was 951 million down 12% from the prior year. The results for this quarter include market related impacts and DentaQuest integration expenses. Our balance sheet and capital position remains strong, as reflected by an underlying return on equity of 15.7% for the quarter, a 5% increase in book value per share over the prior year, a strong capital position with a lockout ratio of 130% SLF up 1% from Q3, and 130 basis points improvement in the leverage ratio of 26.4% last quarter to 25.1%. Let’s turn to our business group performance starting on slide 10, with MFS. MFS underlying net income of U.S. 202 million was down from the prior year, driven by lower average net assets largely reflecting declines in global equity markets.

Reported net income of U.S. 223 million was down 5% reflecting impacts and underlying net income, partially offset by fair value changes on share based payment awards. MFS generated a strong pretax net operating margin of 40%. AUM of U.S. 548 billion was up 8% from Q3, largely reflecting higher equity markets partially offset by net outflows. Retail net outflows of U.S. 8.3 billion in the quarter are impacted by industry wide redemptions, as our investors remain cautious in an uncertain macroeconomic environment. Institutional net outflows were U.S. 3.6 billion in the quarter. Turning to slide 11. SLC Management delivered underlying net income of 38 million and reported net income of 19 million. We are pleased with the attractive business fundamentals at SLC Management.

This includes good momentum and capital raising across all asset classes, including 3 billion in the current quarter, as well as 22% growth in fee related earnings, reflecting the deployment of capital into fee Y earning AUM. Total AUM of 210 billion were 14% year-over-year. This includes 21 billion that has not yet earning fees. Once invested these assets are expected to generate an annualized fee revenue of more than 180 million. Turning to slide 12. Canada’s underlying net income of 324 million was up 22% from the prior year, driven by strong insurance sales, improved disability performances on life health and higher investment gains. This was partially offset by lower fee income and wealth management businesses. Reported net income of 360 million was up slightly from the prior year.

Total protection and health sales were up in the quarter reflecting an increase in large case sales in Sun Life health. On the wealth side retail sales were impacted by the market environment. Group retirement sales increased year-over-year reflecting our differentiated products and services as well as the strength of our client relationships. Turning to slide 13, U.S. underlying net income of U.S. 177 million was up 121 million from the prior year, reported an income of us 81 million was up 13 million. The results were driven by strong performance across all businesses, including the contribution of DentaQuest. Good benefit results were driven by a 16% increase in expected profit and a significant moderation of COVID related mortality and disability impacts.

Business fundamentals remain strong, including good client persistency, strong premium and free growth and solid stop loss underwriting margins. The group benefits after tax profit margin increased at 8.4%. Sales in the U.S. were up 11% year-over-year. We saw good momentum and employee benefits sales reflecting our investments in technology partnerships and new digital capabilities. Stop loss sales were lower reflect In a more competitive pricing environment. Despite the changing competitive dynamic, our focus remains the same, provide value to our clients and maintain good pricing discipline. We’re very pleased with the DentaQuest results. We are on track with our integration milestones and are confident that we will achieve our synergy targets.

DentaQuest delivered strong sales for the year adding approximately 3 million new members in €˜22 20 bringing the total number of members just 36 million. Slide 14 outlines Asia’s results for the quarter. Underlying net income of 152 million was up 16% year-over-year on a constant currency basis. The results are driven by insurance business growth and moderating COVID related experience. Wealth and fee related earnings were impacted by lower equity markets in Asia. Reported net income of 98 million was down from the prior year, largely driven by the gain from the IPO of our Indian Asset Management joint venture and October of last year, and market related impacts. Asia generate double digit insurance sales growth in most markets. We continue to gain momentum reflecting the benefits of our continued focus on client experience, rollout of new products and expanded digital capabilities, as well as the easing of pandemic restrictions.

In corporate, underlying net loss of 39 million reflects a higher effective tax rate compared to the prior year, while reported net income was in line with the prior year. Turning to slide 15. We outlined the progress on our medium term financial objectives. Despite the challenging operating environment 2022 our resilient set of businesses delivered a 9% underlying EPS growth over the five year period. Underlying ROE over the five year period was 14.7% and 15.1% for 2022 reflecting the shift in our mix to capital light businesses, and the payout ratio within our target range of 40% to 50%. We continue to maintain a strong balance sheet and capital position which provides a port to execute on strategic priorities and as a key strength to manage through an uncertain environment.

Looking ahead to 2023 we remain optimistic about the fundamentals across each of our businesses. While we expect the operating environment to remain challenging, we are confident that our leading business positions, focus on client outcomes, discipline, capital expense management, and strong talent will help to drive continued growth. And of course, this will be our final quarter under the current reporting framework as we transition to IFRS 17 in Q1, 2023. As we’ve noted before, IFRS 17 does not impact our core business drives or the fundamental economics of our businesses. It will however, impact the timing and presentation of our financial results. Based on our parallel runs for the first three quarters we have provided some updated disclosures this quarter.

First, we updated the estimated earnings impact for the 2022 restated comparative year from a decrease of mid single digits to a decrease of high single digits. This is largely driven by higher investment activity gains for the year. Our investment team has a proven track record of identifying and executing on opportunities to enhance the spread for investment followed in volatile market environments like we saw for most of 2022. The present value of the higher spread is recognized immediately into earnings under IFRS 4 but we will be recognized over time as we transition to IFRS 17. While the economics and earnings benefit from the high yield is the same over time, it results in a higher IFRS 4 versus 17 difference transition. The second update is that we expect a high single digit increase in the likelihood ratio on transition to IFRS 17.

This is higher than our estimates in May of last year, reflecting updates to our cash flow projections under the new life guidelines, as well as refinements or estimates as you complete our quarterly IFRS 17 parallel reporting. We’re currently in the process of finalizing our dual reporting for the 2022 comparative year and look forward to sharing additional details in May with you with the reporting of our first quarter results. With that I’ll turn the call back to Yaniv for Q&A.

Yaniv Bitton: 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 re-queue with any additional questions. I will now ask the operator to pull the participants.

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Q&A Session

Operator: Thank you. Our first question comes from Meny Grauman with Scotiabank. Your line is open.

Meny Grauman: Hi, good morning. Manjit you concluded your remarks by talking about expecting the operating environment to remain challenging in €˜23. I was hoping you could go into more detail. When I look at it I see some improvement in equity markets that started the year, the reopening in Asia. So, when I look at it, it seems like there’s more reason to be optimistic for the outlook. And so I’m wondering if you could just go into where are the causes for concern as you see them in 2023?

Manjit Singh: Thanks for your question, Meny. I think you’re right. I think we are seeing some signs of improvement. But I don’t think we’re ready to declare victory yet in terms of the overall operating environment. We do sort of see some, some some some potential for things to move back and forth over time. But more importantly, I think, for us, we are very pleased with a diversified set of our businesses and our leadership positions within those businesses. And we feel that as we’ve shown over the last couple of years that we can manage through pretty well through a different, very different types of environments.

Kevin Strain: Meny it’s Kevin Strain. The equity markets year-over-year starting off still down, although they’re up a little bit at the start of the year. And that puts pressure on fee income, which impacts MFS, impacts SLGI, impacts our GRS and pension business in Asia, but also a lot of our universal life business in Asia is tied to fee income as well. So it’s a bit of a headwind. But we are seeing the start of the year look good. I sort of addressed that in my comments as well. We will see how the year performs. But it’s really a factor on the fee income from our equity businesses.

Meny Grauman: Thanks for that, Kevin. And if I could just follow up. You gave an interview about a month ago, talking about M&A opportunities in Asia and the potential opportunities created by the reopening that maybe some deal competitors potentially would be distracted. So I’m wondering if you could provide a little bit more color on those views in terms of how you see opportunities for M&A in Asia in 23? And maybe more specifically, what specific areas are you looking at in Asia for deploying capital in 23?

Kevin Strain: Yes, thanks, Meny. Well post the interview we did the bank insurance deal in Hong Kong, and we’re quite excited about that. That really rounds out our capabilities in Hong Kong. It gives us bank assurance alongside of our agency distribution, we have brokerage there and we have the second largest pension business by flows. So we’re quite happy with where we ended in Hong Kong with that Hong Kong bank insurance deal. As you know, we’ve done a bank insurance deal of a fairly sizable one in Vietnam that I talked about with ACB bank in my remarks and that built on our position with BP. We redid our related our agreement with Grappa which is our CBC bank in the Philippines. So we were quite active in Asia and have been quite active.