February 9, 2022
Sun Life Financial Inc.
Q4 tax benefits help offset negative Covid impacts
Our view: We have a neutral view on SLF's Q4/21 results. COVID impacts were material but the company managed its tax bill to offset. Questions remain on longer-term impacts of COVID, inflation, and the business environment in Hong Kong and China.
SLF's Q4/21 underlying EPS was $1.53, above our estimate of $1.48 and in line with consensus of $1.52, but it included a large tax benefit of about $0.17 per share based on our calculation. Underlying earnings benefited from a low effective tax rate of 4.8%. Against say a 15% tax rate, we calculate a benefit of ~$100 million. This was largely offset by -$113 million of COVID-19-related mortality and morbidity experience (mostly in the U.S.).
SLF U.S. earnings of $72 million (down ~-51% YoY) were well below our forecast of $113 million, mainly driven by negative COVID-19-related experience. The segment was impacted by unfavourable COVID-19-related experience of -$83 million, including a -$65 million impact from mortality and -$18 million impact primarily from disability, as the working-age population mortality continued to be elevated. The after-tax profit margin for U.S. Group Benefits dropped to 5.7% from 8.0% last year.
SLF Canada’s and SLF Asia’s earnings also came in slightly below our forecasts. SLF Canada had underlying earnings of $266 million (up ~10% YoY), below our $281 million forecast. SLF Asia's underlying earnings increased ~12% YoY to $130 million, slightly below our estimate of $137 million, and also had negative COVID-19-related mortality experience of - $12 million.
SLF Asset Management had underlying earnings of $382 million (up ~15% YoY), slightly above our estimate of $375 million, but MFS remained in net outflows. MFS had net outflows of -US$1.2 billion versus net outflows of -US$2.2 billion last quarter.
SLF’s total LICAT ratio was 145% (up 2% QoQ) for the holding company and 124% (flat QoQ) for the operating company. Leverage ratio increased to 25.5% from 22.2% last quarter.
Overall, we have a neutral view on Q4/21 results. Underlying EPS excluding the tax benefit was below our estimate as COVID experience was quite negative. To some degree we think COVID may be a temporary issue rather than a longer-term one, so we think the U.S. can bounce back and the asset management business continues to perform well. Those (and other) strengths are pitted against longer-term concerns on inflation and a "re-think" on parts of Asia.
SLF will host a conference call at 10:00AM ET on Thursday, February 10. The dial-in numbers are 602-563-8756 or 1-877-658-9101, conference ID 6304629.