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SLF.TO - Q2 2021 Sun Life Financial Inc Earnings Call

EVENT DATE/TIME: AUGUST 05, 2021 / 7:00PM GMT

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AUGUST 05, 2021 / 7:00PM, SLF.TO - Q2 2021 Sun Life Financial Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Daniel Fishbein Sun Life - President of Sun Life U.S.

Dean Connor Sun Life - CEO & Director

Jacques Goulet Sun Life - President, Sun Life Canada

Kevin Strain Sun Life - President & Director

Kevin Morrissey Sun Life - Chief Actuary & Senior VP

Leo Grepin Sun Life - President of Sun Life Asia

Manjit Singh Sun Life - Executive VP & CFO

Michael Roberge Sun Life - CEO & President of MFS Investment Management

Steve Peacher Sun Life - President of SLC Management

Yaniv Bitton Sun Life - VP, Head of IR & Capital Markets

C O N F E R E N C E C A L L P A R T I C I P A N T S

Darko Mihelic RBC Capital Markets, Research Division - MD & Equity Analyst

David Kenneth Motemaden Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst Doug Young Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst

Gabriel Dechaine National Bank Financial, Inc., Research Division - Analyst

Humphrey Lee Dowling & Partners Securities, LLC - Research Analyst

Mario Mendonca TD Securities Equity Research - MD & Research Analyst

Meny Grauman Scotiabank Global Banking and Markets, Research Division - MD of Financial Services Equity Research & Analyst Nigel R. D'Souza Veritas Investment Research Corporation - Investment Analyst

Paul David Holden CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

Scott Chan Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst Tom MacKinnon BMO Capital Markets Equity Research - MD & Analyst

P R E S E N T A T I O N

Operator

Good afternoon, ladies and gentlemen. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to Sun Life Financial Second Quarter 2021 Financial Results Conference Call. (Operator Instructions)

The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Mr. Bitton, please go ahead.

Yaniv Bitton - Sun Life - VP, Head of IR & Capital Markets

Thank you, Sarah, and good afternoon, everyone. Welcome to Sun Life's Earnings Call for the Second Quarter of 2021. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com. We will begin today's remarks with a message from Dean Connor, our Chief Executive Officer. We'll then turn it to Kevin Strain, President and incoming CEO, for highlights from the second quarter. Following Kevin's remarks, Manjit Singh, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter. After

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AUGUST 05, 2021 / 7:00PM, SLF.TO - Q2 2021 Sun Life Financial Inc Earnings Call

their prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions this afternoon.

Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events.

And with that, I'll now turn things over to Dean.

Dean Connor - Sun Life - CEO & Director

Thanks, Yaniv, and good afternoon, everyone. As you know, this is my last quarterly earnings call, and I have just a few comments before turning it over to Kevin. It has been the privilege of a lifetime to lead Sun Life for the past nearly 10 years. This is such a great business. We have a noble purpose, helping clients achieve lifetime financial security and live healthier lives. We've put clients in the center of everything we do.

And that plus our purpose has created a magnetic pull for talented employees and advisers who want to have an impact, who want to grow their careers and be part of a winning team. It's that talent and culture that has allowed us to execute effectively on our 4-pillar strategy. I do want to thank our investors who have supported Sun Life's growth strategy and this management team over time. We have benefited from your many questions and suggestions, and we've always imagined that you are in the room alongside us as we made critical decisions around the allocation of your capital.

I also want to thank the many sell-side professionals, who have followed Sun Life and who have invested the time to understand our story and our future prospects. The company will be in great hands with a strong and experienced executive team and with Kevin Strain at the helm. Kevin's skills, character and his experience leading businesses in Canada and Asia and more recently as our CFO, have uniquely equipped him to lead Sun Life onwards to future success.

And with that, I'll now turn the call over to Kevin.

Kevin Strain - Sun Life - President & Director

Thanks, Dean, and good afternoon, everyone. Over the past 10 years, Dean has built a strong foundation for Sun Life, underpinned by our 4-pillar strategy and our focus on clients while nurturing a strong culture, where our people can thrive. Dean is leaving behind a lasting legacy of Sun Life. Under Dean's leadership, the company has made key strategic decisions that drove top-quartile returns for our shareholders, with annualized total shareholder returns of over 18% during his tenure.

On behalf of our employees, advisers and partners around the world, I want to thank Dean for his guidance, inspiration and leadership over the past 15 years he's been with Sun Life. Dean, you are retiring from Sun Life on a high note, and I know you will continue to follow the company closely and will be cheering us on. We wish you the very best.

Turning to Slide 5 for the highlights from the second quarter. Reported net income of CAD $900 million was up CAD $381 million. Underlying net income and earnings per share increased 19% from the prior year, reflecting strong growth across our businesses, driven by investments in our people and technology, as we continue to emerge from pandemic conditions. We also generated a strong underlying return on equity of 16% in the second quarter. With a LICAT ratio of 147% at SLF, we continue to have a strong capital position, which provides flexibility and the opportunity for capital deployment.

While we've been operating and executing in a challenging environment over the past 18 months, we have maintained a relentless focus on our purpose of helping our clients achieve lifetime financial security and live healthier lives. We continue to invest in ways to make it easier for clients to do business with us.

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AUGUST 05, 2021 / 7:00PM, SLF.TO - Q2 2021 Sun Life Financial Inc Earnings Call

In June, we announced that clients in Canada between the ages of 18 to 40 can now qualify for up to CAD $5 million in life insurance coverage without the need for lab exams. This means that approximately 75% of clients may not require lab exams going forward. We are transforming our underwriting processes through data and analytics, using predictive models to replace previously required health tests. At a time when health and financial security have never been more important, we are making life and health insurance more accessible than ever before for our clients.

In Asia, we have made substantial investments in our technology, tools and products. For example, in Hong Kong, our mandatory provident fund offering continues to outperform the market. We are now ranked first in net inflows and third in assets under management based on second quarter results.

We are adding new and innovative capabilities to our group businesses in the U.S. On July 1, we completed our acquisition of PinnacleCare, a leading U.S. health care navigation and medical intelligence provider, which is now part of our U.S. stop-loss and health business. Sun Life and PinnacleCare create a new dynamic that will improve care, outcomes and costs for our clients. PinnacleCare's health advisers help members navigate the complex U.S. health care landscape to identify the best possible treatment options for their unique conditions, leading to better client health outcomes.

Sustainability continues to be a strategic priority for Sun Life. Our commitment also includes sustainable investing. Recently, MFS and InfraRed Capital, our infrastructure manager in SLC Management joined the Net Zero Asset Manager Alliance. In Q2, we also made several investments across our private fixed income portfolio that align to our sustainable investing goals and, more importantly, demonstrate the positive impact we can have on society. These include sustainability-linked financing to a North American shipping company that is reducing the carbon intensity of its fleet annually while keeping in line with ambitious quantifiable decarbonization targets. We also invested in green bonds, where proceeds will be used to improve the efficiency of certain buildings. These are examples of how we continue to incorporate sustainability into our investment decisions.

In the second quarter, wealth sales and asset management gross flows were up 8% from prior year on a constant currency basis, driven by strong gross sales at SLC Management and higher wealth sales in Asia and Canada. In Q2, 96%, 61% and 93% of MFS' U.S. retail fund assets ranked in the top half of their Morningstar categories, based on 10-, 5- and 3-year performance, respectively.

Moving to digital highlights on Slide 6. We look at how digital is helping us deliver on our purpose of helping clients achieve lifetime financial security and live healthier lives. In Canada, our digital coach, Ella, continues to connect with our clients, helping them save for their future and ensure protection of their loved ones. In the first half of the year, Ella's nudges drove nearly CAD $500 million of wealth deposits and the sale of over CAD $650 million in life insurance coverage for our clients.

In the U.S., we are helping clients get the coverage they need through new offerings and digital capabilities. An example of this is the expansion of our online dental health center capabilities, which enable clients to receive dental estimates and access advice virtually from leading dentists. We also continue to advance digital in Asia. In the second quarter, 74% of new insurance applications were submitted digitally, an increase of 41 percentage points over Q2 last year.

Stepping back, we're pleased with the results Sun Life achieved in the first half of the year. We've delivered double-digit earnings growth, strong ROE and maintain a solid balance sheet that provides us with significant flexibility. As some parts of the world have slowly started to open up, we've received many questions about our future work status. Last month, we outlined our guiding principles for our employees for the post-pandemic future of work. This includes supporting flexible work styles, revolving around our client and business needs. In our offices, we're committed to providing safe and healthy working environments that are designed to spark collaboration, productivity and creativity.

We want the office to be a magnet for employees at times when face-to-face collaboration is more effective, and we're making investments in our office spaces to enable this. And whether employees are working from home or in the office, we're committed to providing them with a great seamless work experience with the tools, technology and support they need to do their jobs. Our approach to a hybrid working model supports our goal to attract and retain talent and accelerates our ambition to be one of the best insurance and asset management companies in the world.

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AUGUST 05, 2021 / 7:00PM, SLF.TO - Q2 2021 Sun Life Financial Inc Earnings Call

On a personal note, I'm looking forward to taking on my new role as CEO. I'm committed to building on Sun Life's success and keeping our clients at the center of everything we do, while remaining focused on our key strategic priorities, including continuing to push and support our digital innovation and transformation, making sustainability a key part of our strategy across insurance and asset management, leveraging our asset management strength, fostering a diverse, equitable and inclusive workplace, and above all, nurturing our strong caring, optimistic Sun Life culture where employees can develop and thrive.

With that, I will now turn the call over to Manjit, who will take us through our financial results.

Manjit Singh - Sun Life - Executive VP & CFO

Thank you, Kevin, and good afternoon, everyone. I also want to take a moment to recognize Dean's tremendous contributions during his tenure as CEO and wish him all the very best.

Let's turn to Slide 8 for an overview of our second quarter results. Sun Life delivered good results with strong momentum across all our business pillars. Reported net income of CAD $900 million was up 73% from the prior year, reflecting a recovery of market-related impacts as well as higher underlying net income. Underlying net income of CAD $883 million was up CAD $144 million or 19% from the prior year, driven by business growth, favourable credit experience and a more normalized effective tax rate for the current quarter. These factors are partially offset by unfavourable foreign currency translation, lower investing activity gains and higher incentive compensation, reflecting strong year-to-date performance across all of our businesses.

Q2 underlying earnings per share were CAD $1.50, and underlying return on equity was 16%. Assets under management climbed to nearly CAD $1.4 trillion, reflecting market value growth and strong net flows at SLC Management. For the first half of 2021, our wealth and asset management businesses generated CAD $14 billion of net inflows compared to CAD $8 billion in the first half of 2020. Book value per share was up 2% from the prior year, reflecting strong reported net income growth, mostly offset by foreign currency translation. Excluding impacts and other comprehensive income, book value per share increased 10% over the prior year.

Our balance sheet position remained strong. Q2 LICAT ratios of 147% at SLF and 125% at SLA were up 6 percentage points and 1 percentage point, respectively, from the prior quarter. The main driver of the increase at SLF was the issuance of CAD $1 billion of limited recourse capital notes, which added approximately 5 percentage points of LICAT. The issuance also increased holding company cash to CAD $3.2 billion, and the financial leverage ratio ended the quarter at 24.7%. Subject to regulatory approval, our intention is to redeem 2 series of fixed rate preferred shares totaling CAD $725 million at the end of the third quarter. Upon redemption, SLF's LICAT ratio will decline by approximately 3 percentage points, and the financial leverage ratio will decline by approximately 2%.

Slide 9 highlights the performance of our business groups. Given the significant impact of foreign currency translation on our year-over-year results, we've also provided earnings growth in constant currency on this slide. Canada's reported net income of CAD $404 million in Q2 was up CAD $287 million over the prior year, driven by favourable market-related impacts. Underlying net income of CAD $290 million increased CAD $9 million, reflecting continued business growth in insurance and wealth management as well as favourable credit experience. This was partially offset by a lower contribution from investing activities as the prior year included gains related to investments initiated while credit spreads were more favourable.

The U.S. reported net income of CAD $157 million, was up CAD $39 million versus the prior year, reflecting higher underlying net income. Underlying net income of CAD $165 million was up CAD $42 million or 51% on a constant currency basis, driven by favourable mortality, morbidity and credit experience as well as higher investing activity gains. This was partially offset by unfavourable expense experience from higher incentive compensation costs, reflecting strong results in the first half of 2021. The U.S. Group Benefits business achieved after-tax margin of 8.5% on a trailing 12-month basis, up from 7.5% in the prior year.

Asset Management reported net income was CAD $221 million, down CAD $2 million from the prior year. This reflects fair value adjustments on MFS share-based awards and the impact of a U.K. tax rate change in SLC Management, largely offset by underlying net income growth.

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