August 6, 2020
Sun Life Financial Inc.
A little more noise than we expected but still a good quarter
Impact: Positive
SLF’s Q2/20 underlying EPS came in at $1.26, above our estimate of $1.15 and consensus of $1.12. A higher than usual underlying tax rate may have cost SLF as much $0.08 per share, hence earnings were quite strong compared to our estimate. All core earnings drivers were better than expected (see variance). However, reported EPS of $0.88 was below our estimate of $1.18 (and consensus of $1.10), driven by experience losses of -$403 million (mostly related to net interest rate impacts in Canada) compared to our forecast gain of $23 million.
Underlying earnings from Canada, U.S., and Asset Management were better than our forecasts. Canada had underlying earnings of $281 million, up ~16% YoY and above our $226 million forecast. U.S. underlying earnings came in at $123 million, up ~12% YoY and above our $87 million estimate. SLF Asset Management underlying earnings were $259 million (up ~6% YoY), better than our $236 million forecast. Asia underlying earnings of $144 million were relatively in line with our forecast.
U.S. Group Benefits results were good. Reported net income was US$80 million versus US$78 million last quarter and US$41 million last year. After- tax profit margin of 7.5% was up 70 bps QoQ and 20 bps YoY and total sales were up ~35% QoQ though modestly down ~-2% YoY.
MFS reported total net inflows of US$5.4 billion, better than net inflows of US$1.8 billion last quarter and our estimate of US$0.3 billion. Strong net inflows this quarter were driven by solid mutual fund net inflows of US $6.6 billion (versus US$1.9 billion last quarter), partly offset by continued institutional fund net outflows of -US$1.3 billion (versus -US$0.2 billion last quarter).
SLF’s LICAT ratio at the holding company strengthened to 146% (up 3% QoQ), reflecting debt issuances, but LICAT ratio at the operating company declined to 126% (down -4% QoQ), driven by a switch in the interest rate scenario. The scenario switch is expected to have a total -4% impact on LICAT, with ~-1% reflected in Q2/20 and the remaining to come through over the next five quarters should SLF remain in the current scenario.
Overall, we have a positive view on Q2/20 results. Underlying EPS was above our estimate and consensus and all core earnings drivers and most business segments were better than expected. Reported EPS was a bit noisier than expected, but all considered, no big deal.
SLF will host a conference call at 8:00AM ET on Friday, August 7. The dial- in numbers are 602-563-8756 or 1-877-658-9101 conference ID 4019034.