Sun Life Financial Inc.
Q2/23 was solid — we think ROE improves from here
Our view: SLF had a good quarter in Q2/23, with an underlying EPS of $1.57 above our estimate of $1.54, primarily driven by positive experience gains. SLF's cash available at the holding company (holdco) increased to $2.0 billion and the total holdco LICAT ratio remained strong at 148%. We continue to believe that SLF can deliver strong earnings performance and high ROE, and we continue to rate the stock Outperform.
Key points:
SLF disclosed an underlying EPS of $1.57 in Q2/23, above our estimate and consensus of $1.54. Better than expected results were mainly driven by higher than forecast earnings in Canada and Asset Management. Our core EPS estimates increase for 2023 and 2024. We reflect Q2/23 actual results in our model, refine our contractual service margin recognition methodology, and lower our Canadian earnings on surplus estimates, along with other small changes. Our price target decreases to $76 (was $79).
SLF continued to have a strong capital position, as its total LICAT ratio at the holding company (holdco) level was stable QoQ at 148%. SLF holds $2.0 billion in holdco cash (up from $1.1 billion in Q1/23), and announced an NCIB to buy back up to 17 million common shares in the next 12 months.
SLF Canada base earnings were $372 million, up ~18% QoQ and ~24% YoY, above our estimate of $328 million. This quarter's experience gains were the highest in the last six quarters, compared to our estimate of nil as this is an item we typically do not forecast. The strong experience in Canada was primarily related to favourable disability and morbidity experience, mainly due to lower claims volumes and shorter claims durations.
SLF Asset Management had a better than expected quarter as its base earnings increased ~5% QoQ to $296 million, slightly higher than our $288 million forecast. AUM at MFS increased ~3% QoQ to US$589.1 billion and remained flat QoQ at SLC Management. MFS had net outflows of -US$4.0 billion, similar to last quarter's net outflows of -US$4.3 billion. We view our growth rates for these businesses as conservative.
SLF U.S. had weaker than expected earnings of $215 million versus our estimate of $238 million. Underlying earnings were lower than we forecast mainly due to lower expected earnings on short-term group insurance business and higher than anticipated other expenses compared to our estimates. The group business (ex-dental) has outperformed for quite some time, so a moderation should be expected here. That said, growth in dental has been strong since SLF acquired DentaQuest.
SLF is trading at 1.96x its BVPS, above its historical average of 1.37x and the peer average of 1.42x. On a forward P/E basis, SLF is trading at 10.9x, close to its historical average of 11.0x but above the peer average of 9.3x.