Sun Life Financial Inc.
Solid asset management earnings offset what we think is temporary softness elsewhere
Our view: SLF Asset Management and Canada results came in better than expected, while SLF Asia and SLF U.S. results were impacted by COVID-19 and were softer than our forecasts. We view SLF's increased underlying ROE target of 16% plus as a positive going forward. We maintain our Sector Perform.
Key points:
Our EPS and BVPS (excluding AOCI) estimates move higher following Q3/21 results. Our price target increases to $74 (was $71) and we maintain our Sector Perform rating. Changes to our model largely reflect Q3/21 results and other updates, mainly impacting SLF Asset Management. Overall, our estimate for SLF Asset Management moves higher and is partly offset by a slightly lower expectation for SLF Asia and Corporate, driven by additional assumed losses in our forecast.
SLF Asset Management had strong underlying earnings of $362 million (up ~23% YoY), above our $335 million forecast. MFS remained in net outflows for the third consecutive quarter. MFS’s pre-tax net operating margin was 42% (up ~3% QoQ and ~2% YoY) and average AUM was US $675.6 billion (up ~3% QoQ).
Most segments came in higher than expected, with the exception of SLF U.S. and SLF Asia. Both segments were impacted by unfavourable experience related to COVID-19. SLF U.S. had unfavourable morbidity and mortality experience, as the U.S. had an elevated number of COVID-19 deaths in the working age population in Q3/21. For SLF Asia, there was unfavourable mortality experience in the quarter driven by COVID-19 deaths in the Philippines and Indonesia.
SLF updated their medium-term underlying ROE target to 16% plus (from 12% to 14%). Management indicated that SLF's business mix has shifted towards wealth and asset management and capital-light group and shorter duration insurance businesses, which represent ~80% of the underlying earnings mix.
OSFI announced that restrictions on share buybacks and dividend increases for the Canadian banks and lifecos will be lifted, effective today (November 4) — see our note here. We currently do not assume any dividend increases or share buybacks for SLF. Relative to peers, we believe SLF can hypothetically increase its quarterly dividend the highest at ~35% to $0.74 per share (although perhaps not all at once). Our calculation is based on the midpoint of the target payout range and our current 2022 core EPS estimate.
SLF's holding company (holdco) total LICAT ratio was 143% (down -4% QoQ) but remains higher than peers. SLF intends to redeem preferred shares in Q4/21, which is expected to decrease the holdco ratio by -1% and leverage ratio by -70 bps.
SLF continues to trade higher relative to peers and compared to the historical average. SLF currently trades at a P/B multiple of 1.78x, above the peer average of 1.23x and the historical average of 1.39x.