SUN LIFE FINANCIAL INC.
Leverage To U.S. Equity Markets
Our Conclusion
SLF printed a solid quarter despite the dip in U.S. group earnings. Results
from Asia and SLC were better than expected. MFS remains a key earnings
contributor and needs better market conditions to be an earnings growth
driver. SLF is trading at 10.2x P/E (2024E) versus a peer average of 8.9x. To
become more positive, we need higher conviction that SLF can produce higher
EPS growth than peers. We maintain our $73 price target and Neutral rating.
Key Points
Modest earnings revisions. Our 2024E adjusted EPS decreases by 1%
mostly as a result of lower forecast asset management AUM. MFS AUM was
down 3.1% in October. Given the subsequent equity market rally, we don’t
assume a 3% decline in Q4, but we do assume a 0% market return which is
lower than our normalized quarterly assumption of 2%. There is no change to
our 2025E EPS.
Q3 expected to be the trough for U.S. segmented earnings. Adjusted
earnings were down 13% Q/Q, largely on less favourable experience.
Management expects sales that have yet to hit earned premiums will more
than offset the loss of Medicaid customers that are no longer eligible for
coverage. Also, management is optimistic about the year-end sales cycle for
stop-loss business. In short, earnings are expected to grow relative to the Q3
dip, and management is expecting another year of growth in 2024.
Market share gains in Hong Kong are boosting Asia results. SLF
produced another quarter of solid earnings from Asia, but it was the growth in
individual insurance sales that surprised this quarter (+60% Y/Y). Hong Kong
sales hit $240MM, up 52% Q/Q, reaching a level we have never seen before.
MFC’s Hong Kong sales were $209MM, down 22% Q/Q. It appears SLF has
gained significant share in the Chinese Mainland Visitor market and with the
Dah Sing bancassurance agreement.
Asset management segment is benefitting from growth at SLC. Earnings
and net flows benefitted from continued momentum at SLC, the alternative
asset manager. SLC fee-related earnings were up 17% Y/Y on a 6%
increase in fee-earning AUM. There is another $21.5B of AUM not earning
fees, which will add roughly 18% to revenue once invested. SLC capital
fundraising has remained resilient despite the interest rate headwind. SLC
remains a positive story and an offset to industry headwinds for MFS.
Market impacts better than feared on yield curve movement. Market
impacts were a net positive ($23MM) versus our forecast for negative
$230MM. The big delta came through in interest rate impacts as earnings
benefitted from less yield curve inversion. Real estate returns were negative
$83MM and there is potential for further losses in our opinion. SLF has
increased cap rates by 25-50bps YTD.