Sun Life Financial Inc T.SLF

RBC Notes

[retiredcf]

June 13, 2023

Canadian Life Insurance Chart Book Q1/23 Historical Data and Trends

This is the first quarter update to our RBC Capital Markets Life Insurance Chart Book and the first lifeco chartbook under the new IFRS 17 accounting regime. There will be a temptation to analyze data on an IFRS 17 basis against 2022 IFRS 17 figures; however, only Q1/23 was managed under IFRS 17 whereas Q1/22 was managed under IFRS 4 and the IFRS 17 result was simply calculated after the fact. We will also make comparisons across all lifecos despite what might be some significant disclosure differences. Consequently, please consider this Q1/23 chartbook a “first cut” with a high likelihood of significant evolution from here as our knowledge and understanding of the new accounting regime improves.

Highlights:

• In Q1/23, the Canadian lifecos reported their first quarter of results under IFRS 17. Under IFRS 17, core EPS decreased ~-5% QoQ but increased ~15% YoY on average for the group in the quarter. IAG had the largest QoQ decline in core EPS of ~-15% QoQ, while MFC had a ~3% QoQ increase. MFC previously guided to the largest decrease in earnings on transition to IFRS 17 among the group.

• SLF has the highest medium-term core ROE target of 18%+, up from its previous target of 16% under the previous accounting regime (Exhibit A1). This exhibit is new and also includes Canadian bank targets for further comparability across our entire coverage universe. GWO and MFC also increased their medium-term core ROE targets to 16-17% and 15%+, respectively, while IAG continues to target 15%+. The higher ROE guidance is mostly driven by the decrease in equity brought on by IFRS 17. SLF also disclosed the strongest Q1/23 core ROE of 17.3%, above the peer average of 14.5% (Exhibit B2).

• Under the IFRS 17 drivers of earnings analysis, contractual service margin (CSM) recognized increased ~3% QoQ on a median basis for the group (Exhibit B6). MFC was the only Canadian lifeco to have had a sequential decrease in CSM recognized in the quarter. Risk adjustment release decreased ~-2% QoQ on a median basis, and SLF had the largest QoQ decline of ~-10% QoQ.

• Total LICAT ratios increased QoQ for all the Canadian lifecos in our coverage (Exhibit C7). IAG and SLF had the strongest total LICAT ratios among the group of 145% and 144% respectively at the operating company level, and the holding company total LICAT ratios were 149% and 148%, respectively.

• The Bank of Canada raised the overnight rate by 25 bps on June 7, 2023. As of Q1/23, GWO and SLF expect a positive impact on net income from an increase in interest rates, while IAG and MFC expect a negative impact (Exhibit B11). The lifecos generally benefit from a high interest rate environment.

• The Canadian lifeco index (a custom index that only includes the Canadian lifecos in our coverage) is trading at a P/B multiple of 1.88x, above the historical average since 2009 of 1.38x (Exhibit A5). P/B multiples are higher under the new accounting standard as BVPS is lower under IFRS 17 due to the creation of the CSM (causing historical comparability issues also with ROEs). On a forward P/E basis, the custom Canadian lifeco index is trading at 9.4x, above the historical average since 2009 of 11.0x (Exhibit A2). The “E” in forward P/E multiples may contain more estimation error than usual as analysts are forecasting earnings results after seeing IFRS 17 figures for the first time.