Sun Life Financial Inc T.SLF

TD Notes

[retiredcf]

Life Insurance Q3/23 Outlook

Underlying Fundamentals Strong
But Items of Note Likely to Remain Signficiant

Canada's life insurance companies are scheduled to report Q3/23 results on November 7 (iA Financial [IAG-T]), November 8 (Manulife Financial [MFC-T] and Great-West Lifeco [GWO-T]), and November 13 (Sun Life Financial [SLF-T]). Our Q3/23 adjusted EPS estimates call for y/y growth ranging from a 1-3% increase for IAG and SLF to 17%-19% growth for MFC and GWO. Our estimates are higher than consensus for SLF and GWO and slightly below for MFC and IAG.

On an adjusted basis, we expect the group to deliver strong results supported by: 1) momentum in CSM from new business driven by solid sales momentum in Asia; 2) good wealth management earnings and net flows (offset by the impact of weaker markets and higher interest rates); 3) strong contributions from acquisitions (SLF and GWO); and 4) healthy capital generation and flexibility (a key differentiator from the banks). However, we expect reported results to differ materially from adjusted results.

With two quarters of IFRS 17 under our belts, we believe it is important to track the differences between reported and adjusted EPS. Significant differences between reported and adjusted earnings can arise from how the insurers report invested assets. There are significant differences across the companies regarding the carrying value of invested assets, and by extension how changes in the fair value of the assets impact earnings and/or book value. Under IFRS 17, items of note are ~30% of adjusted earnings. This compares to 5%-10% for the banks (at least until the banks start to report restructuring charges).

Importantly, we believe the significant difference between adjusted and reported earnings will likely continue into Q3/23E. We expect items of note to be elevated again this quarter, driven primarily by market-related charges including: a) equity markets; b) interest rates; and c) investment properties. We expect MFC and IAG to continue to exhibit greater macro sensitivity.

We believe that book value growth is the litmus test for value creation in the financial services sector. We expect common shareholders' equity to remain relatively stable q/q, with items of note (market factors) generally having a slightly negative impact on book value growth this quarter. We believe MFC's and IAG's greater sensitivity to macro factors and, in MFC's case, historical earnings volatility, hurt sentiment on the stocks. We expect the analysis of changes in book value to become more meaningful as we arrive at reliable TTM figures following Q4/23 results.