Sun Life Financial Inc.
Results continue to be solid and solidly reflected in valuation
Our view: Q2/21 results were good driven by strong results in the U.S. and Canada. Our thesis remains unchanged. We increase our price target to $71 (was $69) and we maintain our Sector Perform rating.
Key points:
Following Q2/21 results, our EPS and BVPS (excluding AOCI) estimates move modestly higher. Our price target moves to $71 (was $69) and we maintain our Sector Perform rating. Changes to our EPS estimates reflect Q2/21 results and other modest tweaks, including the expected impact of the decline in the ultimate reinvestment rate in Q3/21.
SLF U.S. underlying earnings of $165 million (up ~34% YoY) were well above our $101 million forecast and reflected solid U.S. Group Benefits results, but we continue to see near-term headwinds for this business. The business benefited from experience gains as mortality experience improved from lower claims related to COVID-19 and morbidity experience was favourable driven by medical stop-loss, partly offset by higher short- term disability and dental claims. The after-tax profit margin for U.S. Group Benefits continued to increase and is now at 8.5% (up 40 bps QoQ and 100 bps YoY), above SLF's target of 7%. Management continued to indicate that favourable morbidity related to stop-loss may likely reflect some delays in treatment due to COVID-19. We continue to expect softer near-term earnings going forward, as we believe utilization and claim experience may increase.
SLF Asia underlying earnings of $152 million (down ~-4% QoQ but up ~6% YoY) were below our estimate of $175 million. The segment was impacted by experience losses due to unfavourable expense experience and higher mortality in India, partly offset by favourable credit experience. Individual insurance sales declined ~-4% QoQ but increased ~49% YoY (constant FX), while wealth sales were strong and increased ~22% QoQ and ~81% YoY (constant FX).
SLF's holding company (holdco) total LICAT ratio increased 6% QoQ to 147%. SLF intends to redeem $725 million of preferred shares in September 2021, which is expected to decrease the holdco total LICAT ratio to 144% and decrease the leverage ratio to 22.9% (from 24.7% as of Q2/21).
SLF trades at a P/B multiple of 1.69x compared to a historical long-term average of 1.39x, which we find justified as SLF's ROE of ~16% (Q2/21, core basis) compares to a longer-term ROE of ~13%. Relative to peers, SLF's P/B multiple is at a ~33% premium compared to a long-term historical average discount of ~-12%. We think SLF's strong relative results and good business mix have resulted in a well-deserved premium to peers, but we believe it will be difficult for further multiple expansion.