Sun Life Financial(SLF) - 2023 Q4 - Annual Report

Executive Summary Financial and Operational Highlights Sun Life reported a strong fourth quarter and full year 2023, with underlying net income of $983 million for Q4 (up 10% YoY) and $3,728 million for the full year (up 11% YoY), driven by robust sales and momentum in group health and protection, despite a 36% decrease in Q4 reported net income to $749 million due to unfavorable market-related impacts, while maintaining a strong capital position with a LICAT ratio of 149% Q4 & Full Year 2023 Key Financial Metrics | Profitability Metric | Q4 2023 | Q4 2022 | Change | Full Year 2023 | Full Year 2022 | Change | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Underlying Net Income | $983M | $892M | +10% | $3,728M | $3,369M | +11% | | Reported Net Income | $749M | $1,165M | -36% | $3,086M | $2,871M | +7% | | Underlying EPS | $1.68 | $1.52 | +10.5% | $6.36 | $5.75 | +10.6% | | Reported EPS | $1.28 | $1.98 | -35.4% | $5.26 | $4.89 | +7.6% | | Underlying ROE | 18.4% | 17.7% | +0.7pp | 17.8% | 17.0% | +0.8pp | | Reported ROE | 14.0% | 23.2% | -9.2pp | 14.7% | 14.5% | +0.2pp | Q4 2023 Underlying Net Income by Business Type (vs Q4 2022) | Business Type | Q4 2023 Underlying NI | Change (YoY) | | :--- | :--- | :--- | | Wealth & asset management | $439M | +7% | | Group - Health & Protection | $365M | +14% | | Individual - Protection | $284M | +23% | - Strategic initiatives in Q4 included the acquisition of Dialogue Health Technologies and an investment in Pillway, a virtual pharmacy, to enhance digital health services in Canada[4] - The company ended Q4 2023 with a strong Life Insurance Capital Adequacy Test (LICAT) ratio of 149% for SLF Inc. and total Assets Under Management (AUM) of $1.4 trillion[7] Business Group Highlights In Q4 2023, Asset Management saw underlying net income grow 2%, with SLC Management's strength offsetting MFS's decline, while Canada was a standout performer with 32% growth in underlying net income, driven by strong sales and improved disability experience, the U.S. segment grew underlying net income by 8% (in USD), and Asia's underlying net income increased by 6%, fueled by a 49% surge in individual sales, particularly in Hong Kong, whereas the Corporate segment reported a larger net loss due to the sale of Sun Life UK and higher expenses - Asset Management: Underlying net income rose 2% to $331M, with MFS experiencing net outflows of $15.3B, while SLC Management had net inflows of $3.9B and its fee-earning AUM grew 8% YoY[10][11][12] - Canada: Underlying net income surged 32% to $350M, and the company completed the acquisition of Dialogue Health Technologies and was selected to administer the Canadian Dental Care Plan[13][15] - U.S.: Underlying net income increased 8% to US$187M, with DentaQuest awarded new Medicaid contracts in Iowa and Arkansas, and the segment recording over US$650M in sales since the acquisition[16][18] - Asia: Underlying net income grew 6% to $143M, with individual sales jumping 49%, driven by Hong Kong, leading to a significant increase in new business Contractual Service Margin (CSM) to $223M from $122M in Q4'22[20][23] - Corporate: Underlying net loss increased to $94M from $62M in the prior year, primarily driven by the sale of Sun Life UK and higher operating expenses[24] Detailed Financial Report A. How We Report Our Results Sun Life reports its financial results across five business segments: Asset Management, Canada, U.S., Asia, and Corporate, having adopted IFRS 17 (Insurance Contracts) and IFRS 9 (Financial Instruments) on January 1, 2023, which impacts the comparability of 2023 results with restated 2022 figures due to updated asset-liability management strategies in Q1 2023 - The company manages its operations and reports financial results in five business segments: Asset Management, Canada, U.S., Asia, and Corporate[31] - On January 1, 2023, the company adopted IFRS 17 and IFRS 9, where restated 2022 results may not be fully representative of the future earnings profile as asset and liability portfolios were not managed under these new standards during that period[32][34] B. Financial Summary This section provides a detailed financial summary table comparing key profitability, growth, and financial strength metrics for Q4'23 against Q3'23 and Q4'22, including underlying and reported net income, EPS, ROE, sales figures, AUM, and capital ratios Quarterly Financial Summary | Metric | Q4'23 | Q3'23 | Q4'22 (restated) | | :--- | :--- | :--- | :--- | | Profitability | | | | | Underlying Net Income | $983M | $930M | $892M | | Reported Net Income | $749M | $871M | $1,165M | | Underlying EPS | $1.68 | $1.59 | $1.52 | | Underlying ROE | 18.4% | 17.7% | 17.7% | | Growth | | | | | Total AUM | $1,399.6B | $1,340.1B | $1,318.6B | | New Business CSM | $381M | $370M | $253M | | Financial Strength | | | | | SLF Inc. LICAT Ratio | 149% | 147% | 142% (as at Jan 1, '23) | | Financial Leverage Ratio | 21.5% | 21.8% | 23.7% (as at Jan 1, '23) | C. Profitability Q4 2023 underlying net income increased 10% year-over-year to $983 million, driven by growth in all protection and wealth management businesses, while reported net income fell 36% to $749 million, primarily due to unfavorable market-related impacts of $193 million from real estate experience and interest rates, with mixed experience items including favorable morbidity in Canada and the U.S. offset by unfavorable expense and credit experience Reconciliation of Underlying to Reported Net Income (Q4'23 vs Q4'22) | ($ millions) | Q4'23 | Q4'22 | | :--- | :--- | :--- | | Underlying net income | 983 | 892 | | Market-related impacts | (193) | 224 | | Assumption changes (ACMA) | (1) | 12 | | Other adjustments | (40) | 37 | | Reported net income | 749 | 1,165 | - The 10% increase in underlying net income was driven by higher earnings in Wealth & asset management (+$27M), Group - Health & Protection (+$44M), and Individual - Protection (+$53M)[43][46] - The 36% decrease in reported net income was primarily caused by unfavorable market-related impacts, especially from real estate and interest rates, and the prior year's positive impact from a Canadian tax rate change[43][45] - The reported effective tax rate for Q4'23 was a recovery of (11.1)%, influenced by declining interest rates and a $51 million tax recovery related to the new Bermuda Corporate Income Tax regime[49][50] D. Growth The company demonstrated strong growth in Q4 2023, with total individual protection sales increasing 42% year-over-year, led by Asia, group health & protection sales growing 8%, and wealth sales & asset management gross flows rising 6%, while total Assets Under Management (AUM) increased by 6% from year-end 2022 to $1.40 trillion, driven by favorable market movements Q4 2023 Sales and Gross Flows (vs Q4 2022) | Sales Category | Q4 2023 | YoY Change | | :--- | :--- | :--- | | Wealth sales & asset management gross flows | $45.8B | +6% | | Group - Health & Protection sales | $1.5B | +8% | | Individual - Protection sales | $707M | +42% | | New business CSM | $381M | +51% | - The 42% surge in individual protection sales was primarily driven by higher sales in Hong Kong and International markets[53] - Total AUM increased by $81.0 billion (6%) from December 31, 2022, to $1.40 trillion, mainly due to $126.9 billion in favorable market movements, partially offset by net outflows and foreign exchange impacts[56] E. Contractual Service Margin The Contractual Service Margin (CSM), representing future insurance profits, grew by 8% during 2023 to end the year at $11.8 billion, driven by strong organic growth from new insurance business, particularly in Asia and Canada, which contributed $1.25 billion, partially offset by the CSM recognized for services provided and a reduction from the sale of Sun Life UK Full Year 2023 CSM Movement | ($ millions) | 2023 | 2022 | | :--- | :--- | :--- | | Beginning of Period | 10,865 | 9,797 | | Impact of new insurance business | 1,253 | 762 | | CSM recognized for services provided | (919) | (861) | | Impact of change in assumptions | 364 | 431 | | Disposition (Sale of Sun Life UK) | (262) | — | | End of Period | 11,786 | 10,865 | - The total CSM balance increased by $0.9 billion (8%) from December 31, 2022[61] - Organic CSM movement was strong, driven by new business from individual protection sales in Asia and Canada, and assumption changes also had a net positive impact of $364 million for the year[61] F. Financial Strength Sun Life maintained a robust financial position, ending Q4 2023 with a LICAT ratio for SLF Inc. of 149%, an increase of seven percentage points from the start of the year, with total capital growing by $1.7 billion to $42.4 billion, and key capital activities including issuing $500 million in subordinated debentures, redeeming $1 billion of existing debentures, and repurchasing $186 million of common shares under its NCIB Key Financial Strength Ratios | Ratio | Q4 2023 | Jan 1, 2023 | | :--- | :--- | :--- | | SLF Inc. LICAT Ratio | 149% | 142% | | Sun Life Assurance LICAT Ratio | 141% | 139% | | Financial Leverage Ratio | 21.5% | 23.7% | - The SLF Inc. LICAT ratio of 149% is well above OSFI's supervisory ratio of 100%, with the increase during 2023 driven by reported net income and capital optimization, partly offset by dividends, debt redemption, and M&A[69][70] - The company holds $1.6 billion in cash and other liquid assets at the parent company level (SLF Inc.), up from $1.1 billion at year-end 2022[72] - In 2023, SLF Inc. purchased and cancelled approximately 2.8 million common shares for a total cost of $186 million under its Normal Course Issuer Bid (NCIB)[76] G. Performance by Business Segment This section provides a detailed breakdown of financial performance for each of Sun Life's five business segments, where for Q4 2023, Canada was the strongest contributor to underlying net income at $350 million, followed by Asset Management at $331 million, the U.S. at $253 million, and Asia at $143 million, while the Corporate segment recorded an underlying net loss of $94 million Q4 2023 Underlying Net Income by Business Segment | ($ millions) | Q4'23 | Q3'23 | Q4'22 | | :--- | :--- | :--- | :--- | | Asset Management | 331 | 330 | 324 | | Canada | 350 | 338 | 265 | | U.S. | 253 | 185 | 230 | | Asia | 143 | 166 | 135 | | Corporate | (94) | (89) | (62) | | Total | 983 | 930 | 892 | 1. Asset Management Asset Management's underlying net income grew 2% YoY to $331 million in Q4, driven by a 26% increase in fee-related earnings at SLC Management, which offset a decline at MFS, as MFS experienced net outflows of US$11.2 billion, while SLC Management continued its growth with net inflows of $3.9 billion and a significant increase in fee-earning AUM - SLC Management's underlying net income increased by $22 million, driven by higher fee-related earnings and seed investment income, while MFS's underlying net income decreased by $15 million due to higher expenses[82][86] Q4 2023 Asset Management Flows | (C$ billions) | MFS | SLC Management | Total | | :--- | :--- | :--- | :--- | | Gross Flows | 30.4 | 8.0 | 38.3 | | Net Flows | (15.3) | 3.9 | (11.4) | - MFS's AUM increased 9% from year-end 2022 to US$598.6 billion, driven by market appreciation which offset net outflows[80][83] 2. Canada The Canada segment delivered a strong quarter with underlying net income increasing 32% YoY to $350 million, with broad-based growth and notable strength in Group Health & Protection due to premium growth and improved disability experience, alongside robust sales across all lines: wealth gross flows up 32%, group sales up 63%, and individual protection sales up 23% - The 32% increase in underlying net income was driven by a $57 million increase in Group - Health & Protection, a $20 million increase in Wealth & asset management, and an $8 million increase in Individual - Protection[88][89] Q4 2023 Canada Sales Growth (YoY) | Business Line | YoY Growth | | :--- | :--- | | Wealth sales & asset management gross flows | +32% | | Group - Health & Protection sales | +63% | | Individual - Protection sales | +23% | 3. U.S. The U.S. segment's underlying net income rose 8% YoY to US$187 million, primarily due to a US$21 million increase in Individual Protection, which benefited from the inclusion of the UK payout annuity business and improved mortality, while Group Health & Protection income declined slightly, and group sales saw a modest 4% increase - Individual - Protection underlying income grew by US$21 million, driven by the inclusion of the UK payout annuity business and better mortality experience[91][93] - Group - Health & Protection underlying income decreased by US$7 million, as lower Dental results offset higher Group Benefits results[91][93] - U.S. group sales increased 4% YoY to US$932 million, driven by higher medical stop-loss and commercial dental sales[92] 4. Asia Asia's underlying net income increased by 6% YoY to $143 million, supported by business growth, with the segment's growth story dominated by a 49% surge in individual sales, driven by strong demand in Hong Kong after pandemic restrictions were lifted, leading to a significant increase in new business CSM, which rose to $223 million from $122 million in Q4'22 - Individual - Protection underlying income grew by $20 million, reflecting strong sales momentum[95] Q4 2023 Asia Sales Growth (YoY) | Business Line | YoY Growth | | :--- | :--- | | Individual - Protection sales | +49% | | Wealth sales & asset management gross flows | +12% | - New business CSM increased to $223 million in Q4'23, up from $122 million in the prior year, primarily driven by sales in Hong Kong and High-Net-Worth[95] 5. Corporate The Corporate segment reported an underlying net loss of $94 million, an increase from the $62 million loss in Q4'22, with the larger loss primarily a result of the sale of Sun Life UK and higher operating expenses, partially mitigated by a lower effective tax rate, resulting in a reported net loss of $41 million, a significant swing from a reported net income of $97 million in the prior-year quarter - The underlying net loss increased from $62 million in Q4'22 to $94 million in Q4'23[97] - Key drivers for the increased underlying loss were the sale of Sun Life UK and higher operating expenses[97][98] H. Non-IFRS Financial Measures This section defines and provides detailed reconciliations for non-IFRS financial measures used by Sun Life to help investors understand underlying business performance, with the primary measure, 'Underlying Net Income', adjusting IFRS reported net income for market-related impacts, assumption changes, and other specific items like acquisition costs, and reconciliations provided for the company as a whole and by business segment - Underlying net income is a non-IFRS measure that removes the following from reported net income: market-related impacts, assumption changes and management actions (ACMA), and other adjustments (e.g., acquisition costs, intangible asset amortization)[105][106] Full Year 2023 Reconciliation of Underlying to Reported Net Income | ($ millions) | 2023 | 2022 | | :--- | :--- | :--- | | Underlying net income | 3,728 | 3,369 | | Market-related impacts | (454) | (21) | | Assumption changes (ACMA) | 36 | (168) | | Other adjustments | (224) | (309) | | Reported net income | 3,086 | 2,871 | - Assets Under Management (AUM) is another key non-IFRS measure, and as of December 31, 2023, total AUM was $1.40 trillion, reconciled from general funds, segregated funds, and third-party AUM[113][114] I. Forward-looking Statements This section contains the standard 'safe harbor' disclosure, cautioning that statements in the report relating to future strategies, growth, and objectives are forward-looking, clarifying that these statements are not guarantees of future performance and are subject to various risks and uncertainties, and listing key risk factors that could cause actual results to differ materially, including market, insurance, credit, business, operational, and liquidity risks - The report contains forward-looking statements regarding strategies, growth initiatives, and other business objectives[124] - These statements are subject to significant risks and uncertainties, with key risk factors including, but not limited to: market risks (equity, interest rates), insurance risks (mortality, morbidity), credit risks, business and strategic risks, operational risks (cyber-attacks), and liquidity risks[126]