August 7, 2020
Sun Life Financial Inc.
Well diversified, well managed business
Our view: Positive - Q2 underlying results were good and better than expected. Our thesis remains positive / unchanged.
Key points:
SLF's Q2/20 underlying EPS could be viewed closer to $1.34, well above our estimate of $1.15 and consensus of $1.12, after adjusting for a higher than normal tax rate. SLF disclosed underlying EPS of $1.26 but results were impacted by as much as -$0.08 per share from higher taxes. All core earnings drivers were better than expected and credit was relatively in line with our forecast.
U.S. underlying earnings of $123 million were up ~12% YoY and above our $87 million forecast. Expected profit growth was solid at ~23% YoY driven by good growth across all U.S. businesses. U.S. Benefits results were good as after-tax profit margin improved to 7.5% (up 20 bps YoY).
Canada underlying earnings came in at $281 million, up ~16% YoY and above our $226 million forecast. Strong earnings growth was driven by solid earnings on surplus growth of ~18% YoY and expected profit growth of ~12% YoY. However, insurance sales in Canada declined ~-49% QoQ as a result of COVID-19 impacts and lower group benefit sales.
Asia had underlying earnings of $144 million, modestly down ~-2% YoY and in line with our estimate. Insurance sales declined ~-25% QoQ reflecting impacts of COVID-19 but sales in Hong Kong and International remained solid. Despite near-term headwinds, we remain positive on the outlook of this segment.
MFS net inflows improved to US$5.4 billion, higher than our forecast as institutional net outflows were better than expected. Mutual funds had solid net inflows of US$6.6 billion and institutional funds had net outflows of -US$1.3 billion (better than our -US$5.9 billion estimate).
Capital ratios remained solid. SLF disclosed a total LICAT ratio of 146% (up 3% QoQ) and 126% (down -4% QoQ) at the holding company (holdco) and operating company, respectively. SLF experienced an interest rate scenario switch in Q2/20 which modestly impacted the LICAT ratios. The acquisition of InfraRed Capital and anticipated debt redemption in Q3/20 are expected to reduce SLF's total LICAT ratio by -5% (proforma 141% at the holdco) which is still a solid capital position in our view.
We made some changes to our model and we maintain our price target and Outperform rating.
Valuations remain above peers but we view it as a deserved premium.
SLF is trading at 9.9x our 2021 core EPS estimate, above the average of 7.3x for the Canadian lifecos. On a P/B basis, the stock is trading at 1.46x, above the peer average of 0.96x.