Sun Life Financial Inc. (SLF) Q2 2025 Earnings Call Transcript

Access earnings results, analyst expectations, report, slides, earnings call, and transcript.

Overview

The earnings call presents a mixed picture. While there are positive elements like the dividend increase, share buyback, and growth in Asia, concerns exist around Medicaid uncertainties, repricing delays, and loss of fees due to MPF changes. The Q&A reveals management's confidence in long-term growth but acknowledges near-term challenges. The neutral rating reflects the balance of positive strategic moves against the current operational uncertainties and financial impacts.

Key Financial Performance

Underlying EPS $1.79, up 4% year-over-year. This increase reflects the strength and resilience of the company's balanced and diversified business model.

Underlying Net Income $1.015 billion, up 2% year-over-year. Growth was driven by higher U.S. Dental results and favorable mortality experience in Canada.

Underlying ROE 17.6%, down from the prior year due to higher average equity from earnings growth and changes to other comprehensive income from foreign exchange and interest rates.

LICAT Ratio 151%, up 2 points from the prior quarter. This increase was due to strong organic capital generation offsetting dividends, share buybacks, and market impacts.

MFS Assets Under Management (AUM) USD 635 billion, up 3% year-over-year and 5% over the prior quarter. Growth was driven by market appreciation, despite net outflows.

SLC Management Fee-Earning AUM $194 billion, up 9% year-over-year. Growth was driven by deployments and market appreciation.

Canada Wealth AUM $203 billion, up 12% year-over-year. Growth was driven by market appreciation and net inflows.

Asia Wealth Assets Up 21% year-over-year. Growth was driven by strong inflows to newly launched equity funds and favorable markets.

Asia CSM $6.2 billion, up 23% year-over-year. Growth was driven by strong organic CSM growth.

Group Health and Protection Underlying Earnings (Canada) Up 7% year-over-year. Growth was driven by higher U.S. Dental results and favorable mortality experience in Canada.

Individual Protection Underlying Net Income (Canada and U.S.) Down 10% year-over-year. Decline was due to unfavorable mortality experience in Canada and the U.S.

Group Sales (Canada) Up 41% year-over-year. Growth was driven by large case sales.

Individual Protection Sales (Canada) Down 19% year-over-year. Decline was driven by third-party sales.

U.S. Group Health and Protection Sales USD 226 million, down 7% year-over-year. Decline was due to pricing discipline in a competitive market for medical stop-loss.

Asia Individual Protection Sales Up 22% year-over-year. Growth was driven by momentum in Hong Kong, bancassurance in Indonesia, and sales growth in India.

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Operating Highlights

Index Universal Life Insurance Product: Launched in Hong Kong for professional investors, addressing demand for high-end wealth management solutions.

Reimagined Mobile Application: Launched in Canada with enhanced health, wealth, and protection features.

Adviser Notes Assistant: A generative AI tool launched in Canada to enhance client experience and streamline workflows.

Adviser Buddy: AI chatbot piloted in Hong Kong to support advisers across the sales journey.

Straight-through Processing for Supplemental Health Accident Insurance: Implemented in the U.S. to improve productivity and client experience.

Asia Market Expansion: Record quarter in Asset Management and Wealth businesses, with strong inflows in India and sales growth in Hong Kong.

Canada Market Growth: Asset Management and Wealth businesses exceeded $200 billion in assets, with strong sales in Sun Life Health.

U.S. Market Leadership: Employee Benefits business achieved record earnings, with continued leadership in the stop-loss market.

Digital Advancements: Deployment of generative AI capabilities across regions, enhancing productivity and operations.

Real-time Underwriting in Malaysia: Enhanced operations to speed up the sales cycle.

Capital Raising at SLC Management: Achieved $6 billion in capital raising, doubling over last year.

Investment in Bowtie: Further investment in Bowtie, recognized as the fastest-growing company in Hong Kong, to advance health insurance accessibility.

Leadership Transition in U.S.: David Healy to become President of Sun Life U.S., succeeding Dan Fishbein, who will retire in 2026.

Chief Actuary Transition: Brennan Kennedy to replace Kevin Morrissey as Chief Actuary, ensuring continuity in leadership.

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Risk or Challenges

U.S. Dental Business: The U.S. Dental business has been affected by impacts to the U.S. healthcare environment, including higher Medicaid claims due to increased per-member utilization and severity. Additionally, uncertainty around Medicaid funding has slowed repricing actions, contributing to elevated dental loss ratios. These challenges have led to a reforecasting of expected earnings trajectory for the business.

MFS Outflows: MFS experienced outflows of $14.3 billion this quarter, driven by retail outflows due to market uncertainty and institutional outflows from client rebalancing activity. This reflects volatility in equity markets and poses a challenge to maintaining asset management growth.

Market-Related Impacts: Reported earnings were impacted by unfavorable interest rate impacts, real estate experience, and market volatility. These factors contributed to a variance between reported and underlying net income.

U.S. Medical Stop-Loss Business: The competitive market for medical stop-loss has led to pricing discipline challenges. Morbidity results reflected reserve accumulation and a previously indicated 2% pricing shortfall, impacting profitability.

Unfavorable Mortality Experience: Unfavorable mortality experience in Canada and the U.S. negatively impacted individual protection earnings, contributing to a 10% decline in this segment.

Regulatory and Funding Uncertainty: Uncertainty around Medicaid funding in the U.S. has created challenges for repricing actions in the dental business, contributing to financial strain.

Real Estate Returns: Real estate returns were flat for the quarter, below long-term expected returns, impacting reported net income.

Currency Impacts: Fee-earning AUM in SLC Management was down 4% sequentially, driven mostly by currency impacts, which could affect future revenue generation.

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Guidance & Outlook

Revenue and Earnings Growth: Sun Life expects continued growth in its U.S. Employee Benefits business, with a focus on maintaining its leadership in the stop-loss market. The company anticipates challenges in the U.S. Dental business due to Medicaid funding uncertainties but remains committed to achieving a 12%+ medium-term underlying earnings growth objective for the U.S. segment overall.

Capital Management: The company plans to maintain a strong capital position, with a LICAT ratio of 151% and ongoing share buybacks. Organic capital generation is expected to remain robust, supporting dividends and share repurchases.

Asia Growth: Sun Life projects strong growth in Asia, driven by bancassurance distribution and individual protection sales. The company expects continued momentum in Hong Kong and India, with a focus on innovative products like the index universal life insurance for professional investors.

Digital Transformation: The company is advancing its digital capabilities, including AI-driven tools and mobile applications, to enhance client experience and operational efficiency. These initiatives are expected to support long-term growth and productivity.

Asset Management: Sun Life anticipates strong performance in its asset management business, with continued capital raising and deployment in private assets. The company expects MFS to maintain solid margins and cash flow despite market volatility.

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Shareholder Return Plan

Underlying net income: $1.015 billion, up 2% year-over-year

Underlying earnings per share: $1.79, up 4% year-over-year

Organic capital generation, net of dividends: $673 million, above target range of 30%-40% of underlying net income

Share buyback program: Close to $400 million of Sun Life shares repurchased this quarter

Shares repurchased: 4.8 million shares repurchased this quarter under the share buyback program

Capital returned to shareholders: Almost $1 billion returned to shareholders during the quarter

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Key Q&A

Q:How should we think about the evolution of the U.S. Dental business over the next 5 years, and what is the outlook for goodwill and intangibles related to DentaQuest?

A:Management highlighted near-term uncertainties, particularly around Medicaid and repricing, which have led to a reforecast of earnings outlook. They remain committed to a 12%+ medium-term earnings growth objective for the U.S. segment, with Dental contributing at least 1/3 of that growth. Long-term confidence is based on being the largest Dental benefits provider in the U.S., growth opportunities in the commercial space, and repricing actions. Regarding intangibles, customer relationships and system intangibles were set up at $1.2 billion, and goodwill at $2 billion. Management tests for impairment regularly and currently sees no need for a write-off.

Q:Why did the ASO group Dental contract terminate, and what is the status of repricing efforts?

A:The ASO group Dental contract terminated because the client, a nonprofit, preferred working with another related nonprofit party. The client will remain until August 2026, and this situation is considered unique. On repricing, uncertainty around Medicaid funding has slowed negotiations with states and health plans. While 80% of Medicaid membership is children, the changes in the reconciliation bill largely affect adult coverage. Management expects repricing to take longer than anticipated but is making progress.

Q:What is the impact of the Monetary Provident Fund Scheme Authority taking on administrative responsibilities for MPF assets?

A:The impact is a loss of CAD 10 million in quarterly fees for Sun Life. However, the business remains strong with good growth and ROE. Management is pivoting to focus more on asset management in this space.

Q:What is the performance of the U.S. medical stop-loss business, and is there a need to accelerate repricing actions?

A:Management was pleased with the stop-loss results, which have stabilized after a significant spike in medical expenses in Q4. Earnings were slightly down compared to last year but in line with expectations. Pricing for 2025 has been adjusted to reflect experience, and early data for the 2025 cohort is reassuring.

Q:What explains the difference between year-over-year growth in earnings and underlying growth for SLC?

A:The difference is due to accounting differences, including catch-up fees and marks on seed investments. Management fees and fee-related earnings are stable and track with AUM. Fundraising and net flows are trending up, with $6 billion in fundraising this quarter.

Q:What is the outlook for growth in Asia, and what is the significance of the investment in Bowtie?

A:Management is optimistic about growth in Asia, focusing on client needs and execution. The investment in Bowtie, a digital insurance company in Hong Kong, complements Sun Life's distribution force and enhances its direct-to-consumer model.

Q:What are the drivers of increased severity and frequency in Dental claims, and what is the outlook for repricing?

A:Increased severity and frequency are driven by claim backlogs, reprocessed claims, and billing practices aided by AI. Management expects Q3 to be the most adverse due to seasonality but anticipates improvement in Q4. Repricing is expected to take until 2026 to fully reflect changes in business mix and achieve expected margins.

Q:What is the growth strategy for the U.S. Dental business, particularly in Medicaid and commercial segments?

A:The Medicaid business has shrunk due to the end of the public health emergency but is expected to grow with 6 million new members by January 2026. The commercial segment, which represents less than 20% of the business, is growing faster and is a strategic focus for future growth.

Q:What is the outlook for MFS margins and flows?

A:MFS margins are influenced by average net assets and seasonality. Management expects margins to improve in Q3 and Q4 as net assets recover. Flows are expected to remain under pressure in the near term due to institutional rebalancing and elevated retail redemption rates but are optimistic about long-term recovery.

Q:What is the status of goodwill related to DentaQuest, and how is it tested for impairment?

A:Goodwill is tested using a long-term discounted cash flow approach. Despite near-term headwinds, management remains confident in the long-term outlook and sees no need for a write-down. The carrying value is supported by integrated cash flows from the combined business.

Q:Review of Unclear Management Responses

A:Management avoided providing a direct answer to the question about the evolution of the U.S. Dental business over the next 5 years, particularly regarding the $250 million target by 2029. They also used vague language when discussing the timeline for repricing actions and the impact of Medicaid funding uncertainty, making it difficult to assess the exact trajectory of recovery.

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Earnings Word Cloud

The most frequently occurring keywords in this quarter's earning call

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The earnings call highlights strong growth in Asia, particularly in individual protection sales and total CSM, which are significant positive indicators. The Q&A section reveals some challenges, such as Medicaid repricing and stop-loss business pricing, but overall, the company maintains a strong capital position with ongoing share buybacks and positive asset management performance. The company's focus on digital transformation and capital management further supports a positive outlook. Despite some uncertainties, the overall sentiment leans towards a positive market reaction, especially with optimistic guidance in key growth areas.

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