Sun Life Financial(SLF) - 2023 Q2 - Quarterly Report

Earnings News Release Shareholder Information This section provides administrative details for Canadian shareholders, including share sale instructions and contact information - Canadian shareholders can sell shares for $15 plus 3 cents per share by completing Form A and returning it to TSX Trust Company[1] - For more information, TSX Trust Company can be reached at 1 877 224-1760[1] Company Overview & Q2'23 Highlights Sun Life reported resilient Q2 2023 results, driven by strong health and protection sales and strategic acquisitions, with new IFRS 17 and IFRS 9 standards impacting reporting - Sun Life manages operations and reports financial results in five business segments: Canada, United States, Asset Management, Asia, and Corporate[3] - The company adopted IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments on January 1, 2023, which replaced previous standards[3] - CEO Kevin Strain highlighted strong Q2 results, resilience in a challenging economic environment, and growth in health and protection sales[4] - Key strategic moves include the announcement to acquire Dialogue Health Technologies, solid Q2 results from DentaQuest, and a strong start to the bancassurance partnership with Dah Sing Bank in Hong Kong[4] Q2'23 vs Q2'22 Profitability Highlights | Profitability Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($ millions) | Change (%) | | :------------------- | :----------------- | :----------------- | :------------------ | :--------- | | Underlying net income | 920 | 808 | 112 | 14% | | Reported net income | 660 | 930 | (270) | (29)% | | Underlying EPS | 1.57 | 1.38 | 0.19 | 13.8% | | Reported EPS | 1.12 | 1.58 | (0.46) | (29.1)% | | Underlying ROE | 17.7% | 16.7% | 1.0% pts | - | | Reported ROE | 12.7% | 19.2% | (6.5)% pts | - | Financial and Operational Highlights - Quarterly Comparison (Q2'23 vs. Q2'22) Q2 2023 underlying net income rose 14% from strong health and protection, but reported net income fell 29% due to market impacts and prior-year gains Q2'23 vs Q2'22 Underlying Net Income by Business Type ($ millions) | Business Type | Q2'23 | Q2'22 | Change ($) | Change (%) | | :------------------------ | :---- | :---- | :--------- | :--------- | | Wealth & asset management | 419 | 420 | (1) | (0.2)% | | Group - Health & Protection | 360 | 238 | 122 | 51% | | Individual - Protection | 265 | 215 | 50 | 23% | | Corporate expenses & other | (124) | (65) | (59) | (90.8)% | | Total Underlying Net Income | 920 | 808 | 112 | 14% | Q2'23 vs Q2'22 Sales Growth by Business Type ($ millions) | Sales Metric | Q2'23 | Q2'22 | Change ($) | Change (%) | | :-------------------------------- | :------- | :------- | :--------- | :--------- | | Wealth sales & asset management gross flows | 42,397 | 56,279 | (13,882) | (25)% | | Group - Health & Protection sales | 656 | 320 | 336 | 105% | | Individual - Protection sales | 604 | 416 | 188 | 45% | - The 14% increase in underlying net income was driven by strong performance in Group - Health & Protection (up $122 million) due to premium growth, better disability experience, and DentaQuest contributions, and Individual - Protection (up $50 million) from higher premiums and improved insurance experience[7][9] - The 29% decrease in reported net income was primarily due to market-related impacts (interest rates and real estate investments), a prior year gain on the sale-leaseback of the Wellesley office, and fair value changes in MFS shares, partially offset by the increase in underlying net income[7][9] Performance by Business Segment Sun Life's Q2 2023 segments showed varied performance: Asset Management stable with outflows, Canada and U.S. strong, Asia growing, Corporate loss increasing Q2'23 vs Q2'22 Underlying Net Income by Business Segment ($ millions) | Business Segment | Q2'23 | Q2'22 (Restated) | Change ($) | Change (%) | | :--------------- | :---- | :--------------- | :--------- | :--------- | | Asset Management | 296 | 295 | 1 | 0.3% | | Canada | 372 | 299 | 73 | 24% | | U.S. | 215 | 134 | 81 | 60% | | Asia | 150 | 118 | 32 | 27% | | Corporate | (113) | (38) | (75) | (197.4)% | | Total | 920 | 808 | 112 | 14% | Q2'23 vs Q2'22 Reported Net Income by Business Segment ($ millions) | Business Segment | Q2'23 | Q2'22 (Restated) | Change ($) | Change (%) | | :--------------- | :---- | :--------------- | :--------- | :--------- | | Asset Management | 248 | 298 | (50) | (17)% | | Canada | 210 | 476 | (266) | (56)% | | U.S. | 175 | 149 | 26 | 17% | | Asia | 122 | 7 | 115 | nm | | Corporate | (95) | 0 | (95) | nm | | Total | 660 | 930 | (270) | (29)% | Asset Management Asset Management Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 296 | 295 | 1 | 0.3% | | Reported net income | 248 | 298 | (50) | (17)% | | AUM ($ billions) | 998 | 905 | 93 | 10.3% | | Total net outflows | 3.3 | (0.3) | 3.6 | nm | - Underlying net income was stable, with higher investment income offset by lower fee-based earnings in MFS due to equity market declines and higher expenses in Canada[9] - Reported net income decreased by 17% due to fair value changes in MFS shares and losses on real estate investments[10] - Asset Management ended Q2'23 with $998 billion of AUM, but experienced total net outflows of $3.3 billion, primarily from MFS[11] - BentallGreenOak (BGO) received Gold Recognition in the 2023 Green Lease Leaders program, and InfraRed Capital Partners (InfraRed) invested in JOLT, an e-mobility company, supporting sustainable investing targets[12] Canada Canada Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 372 | 299 | 73 | 24% | | Reported net income | 210 | 476 | (266) | (56)% | | Wealth sales & asset management gross flows | 3,130 | 3,341 | (211) | (6)% | | Group - Health & Protection sales | 153 | 92 | 61 | 66% | | Individual - Protection sales | 154 | 126 | 28 | 22% | - Underlying net income increased by 24%, driven by better disability experience in Group - Health & Protection and improved insurance experience in Individual - Protection[13][16] - Reported net income decreased by 56% due to market-related impacts, primarily from interest rates and real estate experience[16] - Canada launched Lumino Health Pharmacy, a new online pharmacy app, and entered an agreement to acquire Dialogue Health Technologies Inc., Canada's premier virtual health care platform[13][14] U.S. U.S. Q2'23 vs Q2'22 Financials (US$ millions) | Metric | Q2'23 (US$ millions) | Q2'22 (US$ millions) | Change (US$) | Change (%) | | :---------------------- | :------------------- | :------------------- | :----------- | :--------- | | Underlying net income | 160 | 102 | 58 | 57% | | Reported net income | 133 | 113 | 20 | 18% | | Group sales | 484 | 213 | 271 | 127% | - Underlying net income increased by 57%, driven by strong performance across all businesses, including good premium growth, DentaQuest contributions, higher investment contributions, and favorable experience (medical stop-loss margins, group disability)[17][25] - U.S. group sales increased by $271 million, primarily from higher dental and medical stop-loss sales[18] - Expanded Advantage Dental+ care practices in Texas and recorded the largest Medicare Advantage sale in DentaQuest history[18] - Announced a relationship with Independence Health Group to exclusively provide medical stop-loss insurance[19] Asia Asia Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 150 | 118 | 32 | 27% | | Reported net income | 122 | 7 | 115 | nm | | Wealth sales & asset management gross flows | 1,616 | 3,298 | (1,682) | (51)% | | Individual - Protection sales | 450 | 290 | 160 | 55% | | New business CSM | 118 | 70 | 48 | 68.6% | - Underlying net income increased by 27%, driven by higher premiums and improved expenses and lapse experience in joint ventures for Individual - Protection, partially offset by lower fee-based earnings in Wealth & Asset Management[20][26] - Individual sales were up 55%, driven by higher sales in Hong Kong, China, and India[26] - New business CSM increased to $118 million, primarily from sales and favorable product mix in High-Net-Worth and Hong Kong[22] - Introduced eSunPro, a new digital health care service platform in Hong Kong, and opened the Sun Gateway prestige Client center for High-Net-Worth Clients[23][24] Corporate Corporate Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 (Restated) ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :---------------------------- | :--------- | :--------- | | Underlying net loss | (113) | (38) | (75) | (197.4)% | | Reported net loss | (95) | 0 | (95) | nm | - Underlying net loss increased due to higher operating expenses (including incentive compensation), increased debt financing costs, and the impact from the sale of Sun Life UK, partially offset by higher investment income from surplus assets[27] - Reported net loss was $95 million, compared to nil in the prior year, reflecting the change in underlying net loss and market-related impacts, partially offset by a gain on the sale of Sun Life UK[28] Sustainability and Capital Initiatives Sun Life continues its commitment to sustainable investing, evidenced by its recognition as a top sustainable corporation and the issuance of a new sustainability bond - Sun Life was recognized as one of Corporate Knights' Global 100 Most Sustainable Corporations in the World for the 14th consecutive year, ranking as the top insurance company globally[29] - The company announced its second sustainability bond offering, issuing $500 million, with proceeds to be invested in green and/or social assets[29] Management's Discussion and Analysis A. How We Report Our Results Sun Life manages operations across five segments, adopting IFRS 17 and IFRS 9 on January 1, 2023, impacting financial reporting - Sun Life's operations are managed and reported in five business segments: Canada, United States, Asset Management, Asia, and Corporate[34] - Effective January 1, 2023, Sun Life adopted IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments, replacing IFRS 4 and IAS 39, respectively[35] - 2022 results have been restated for the adoption of the new standards, but may not be fully representative of future earnings as asset and liability portfolios were not managed under these standards at that time[37] - The company reports certain financial information using non-IFRS financial measures to provide useful insights into performance and facilitate period-to-period comparisons[39] B. Financial Summary The financial summary highlights Q2 2023 and YTD profitability, growth, and strength, showing increased underlying net income, strong protection sales, and decreased wealth flows Q2'23 and YTD 2023 Key Financial Metrics | Metric | Q2'23 | Q1'23 | Q2'22 (Restated) | YTD 2023 | YTD 2022 (Restated) | | :---------------------------------------- | :--------- | :--------- | :--------------- | :--------- | :------------------ | | Underlying net income ($ millions) | 920 | 895 | 808 | 1,815 | 1,528 | | Reported net income ($ millions) | 660 | 806 | 930 | 1,466 | 1,595 | | Underlying EPS ($) | 1.57 | 1.52 | 1.38 | 3.09 | 2.61 | | Reported EPS ($) | 1.12 | 1.37 | 1.58 | 2.49 | 2.72 | | Underlying ROE (%) | 17.7% | 17.3% | 16.7% | 17.5% | 15.6% | | Reported ROE (%) | 12.7% | 15.6% | 19.2% | 14.2% | 16.3% | | Wealth sales & asset management gross flows ($ millions) | 42,397 | 46,349 | 56,279 | 88,746 | 113,235 | | Group - Health & Protection sales ($ millions) | 656 | 543 | 320 | 1,199 | 710 | | Individual - Protection sales ($ millions) | 604 | 511 | 416 | 1,115 | 825 | | Total AUM ($ billions) | 1,366.8 | 1,363.6 | 1,257.4 | 1,366.8 | 1,257.4 | | New business CSM ($ millions) | 270 | 232 | 189 | 502 | 332 | | SLF Inc. LICAT ratio (%) | 148% | 148% | 142% (Jan 1, 2023) | - | - | | Financial leverage ratio (%) | 23.3% | 23.2% | 23.7% (Jan 1, 2023) | - | - | - Underlying net income increased by 14% in Q2'23 and 19% year-to-date 2023 compared to prior periods, while reported net income decreased by 29% in Q2'23 and 8% year-to-date 2023[43] - Wealth sales & asset management gross flows decreased by 25% in Q2'23 and 22% year-to-date, while Group - Health & Protection sales surged by 105% in Q2'23 and 69% year-to-date[43] C. Profitability Sun Life's Q2 2023 underlying net income rose 14% from strong health and protection, but reported net income fell 29% due to market impacts and prior-year gains Q2'23 vs Q2'22 Profitability Reconciliation ($ millions, after-tax) | Metric | Q2'23 | Q2'22 (Restated) | Change ($) | Change (%) | | :---------------------------------------- | :---- | :--------------- | :--------- | :--------- | | Underlying net income | 920 | 808 | 112 | 14% | | Market-related impacts | (220) | 118 | (338) | nm | | Assumption changes and management actions | 7 | (22) | 29 | nm | | Other adjustments | (47) | 26 | (73) | nm | | Reported net income | 660 | 930 | (270) | (29)% | - Underlying net income increased by $112 million (14%) in Q2'23, primarily from Group - Health & Protection (up $122 million) due to premium growth, better disability experience, and DentaQuest contributions, and Individual - Protection (up $50 million) from higher premiums and improved insurance experience[46] - Reported net income decreased by $270 million (29%) in Q2'23, mainly due to market-related impacts (real estate investments and interest rates), a prior year gain on the sale-leaseback of the Wellesley office, and fair value changes in MFS shares[46] - Year-to-date, underlying net income increased by $287 million (19%), while reported net income decreased by $129 million (8%), driven by similar factors as the quarterly comparison[53][57] - Foreign exchange translation positively impacted Q2'23 underlying net income by $27 million and reported net income by $25 million[47][52] D. Growth Sun Life's Q2 2023 growth was mixed, with strong Group and Individual Protection sales, but decreased wealth sales and asset management gross flows, while AUM and new business CSM increased Q2'23 vs Q2'22 Sales and Gross Flows ($ millions) | Sales Category | Q2'23 | Q2'22 | Change ($) | Change (%) | | :---------------------------------------- | :------- | :------- | :--------- | :--------- | | Wealth sales & asset management gross flows | 42,397 | 56,279 | (13,882) | (25)% | | Group - Health & Protection sales | 656 | 320 | 336 | 105% | | Individual - Protection sales | 604 | 416 | 188 | 45% | | New business Contractual Service Margin (CSM) | 270 | 189 | 81 | 42.9% | - Total AUM increased by $48.3 billion (4%) from December 31, 2022, reaching $1,366.8 billion, primarily driven by favorable market movements and the AAM acquisition, partially offset by foreign exchange translation and net outflows[6][66] - Segregated fund and third-party AUM experienced net outflows of $2.2 billion during the quarter, with MFS having net outflows of $5.3 billion[67] - New business CSM, representing growth from sales activity, increased to $270 million in Q2'23 from $189 million in the prior year, driven by Canada individual protection sales and Asia's High-Net-Worth and Hong Kong sales[64] E. Contractual Service Margin The Contractual Service Margin (CSM) grew 4% to $11.3 billion in H1 2023, driven by new business, favorable experience, and assumption changes, despite currency impacts and the Sun Life UK sale - Total CSM ended Q2'23 at $11.3 billion, an increase of $0.4 billion or 4% for the six months ended June 30, 2023[70] - Organic CSM movement was driven by new insurance business, reflecting individual protection sales in Canada and Asia, and favorable insurance experience in Canada[71] - The impact of change in assumptions included a contract modification that increased CSM[71] - Unfavorable currency impacts and a $262 million reduction from the sale of Sun Life UK partially offset the CSM growth[71] CSM Movement (Six Months Ended June 30, 2023) | CSM Component | Amount ($ millions) | | :---------------------------------- | :------------------ | | Beginning of Period | 10,865 | | Impact of new insurance business | 502 | | Expected movements from asset returns & locked-in rates | 256 | | Insurance experience gains/losses | 114 | | CSM recognized for services provided | (443) | | Organic CSM Movement | 429 | | Impact of markets & other | 7 | | Impact of change in assumptions | 330 | | Currency impact | (111) | | Disposition (Sun Life UK sale) | (262) | | Total CSM Movement | 393 | | Contractual Service Margin, End of Period | 11,258 | F. Financial Strength Sun Life maintained strong Q2 2023 financial strength, with LICAT ratios above minimums and total capital rising to $41.3 billion, supported by net income, CSM growth, and strategic initiatives Financial Strength Metrics (Q2'23 vs Jan 1, 2023) | Metric | Q2'23 | Jan 1, 2023 | | :------------------------------------ | :------ | :---------- | | SLF Inc. LICAT ratio | 148% | 142% | | Sun Life Assurance LICAT ratio | 139% | 139% | | Financial leverage ratio | 23.3% | 23.7% | | Total capital ($ billions) | 41.3 | 40.6 | | Book value per common share ($) | 34.86 | 34.60 | - SLF Inc.'s LICAT ratio increased by six percentage points to 148% as at June 30, 2023, driven by reported net income, the sale of Sun Life UK, and capital optimization[76] - Total capital was $41.3 billion as at June 30, 2023, an increase of $0.7 billion compared to January 1, 2023, primarily due to reported net income and an increase in CSM[80] - Sun Life commenced a 15-year exclusive bancassurance partnership with Dah Sing Bank in Hong Kong, issued a $500 million sustainability bond, and announced an intention to launch a normal course issuer bid to purchase up to 17 million common shares[82][83][86] - The company also announced an agreement to acquire Dialogue Health Technologies Inc., increasing its ownership interest from approximately 23% to 97%[85] G. Performance by Business Segment Sun Life's Q2 2023 segments showed varied performance: Asset Management stable with outflows, Canada and U.S. strong, Asia growing, Corporate loss increasing Q2'23 vs Q2'22 Underlying Net Income by Business Segment ($ millions) | Business Segment | Q2'23 | Q2'22 (Restated) | Change ($) | Change (%) | | :--------------- | :---- | :--------------- | :--------- | :--------- | | Asset Management | 296 | 295 | 1 | 0.3% | | Canada | 372 | 299 | 73 | 24% | | U.S. | 215 | 134 | 81 | 60% | | Asia | 150 | 118 | 32 | 27% | | Corporate | (113) | (38) | (75) | (197.4)% | | Total | 920 | 808 | 112 | 14% | Q2'23 vs Q2'22 Reported Net Income by Business Segment ($ millions) | Business Segment | Q2'23 | Q2'22 (Restated) | Change ($) | Change (%) | | :--------------- | :---- | :--------------- | :--------- | :--------- | | Asset Management | 248 | 298 | (50) | (17)% | | Canada | 210 | 476 | (266) | (56)% | | U.S. | 175 | 149 | 26 | 17% | | Asia | 122 | 7 | 115 | nm | | Corporate | (95) | 0 | (95) | nm | | Total | 660 | 930 | (270) | (29)% | 1. Asset Management Asset Management Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 296 | 295 | 1 | 0.3% | | Reported net income | 248 | 298 | (50) | (17)% | | AUM ($ billions) | 997.8 | 905.3 | 92.5 | 10.2% | | Gross flows ($ billions) | 37.7 | 49.6 | (11.9) | (24)% | | Net flows ($ billions) | (3.3) | 0.3 | (3.6) | nm | - Underlying net income was largely flat, with higher investment income offset by lower fee-based earnings in MFS due to equity market declines and higher expenses in Canada[92][97] - Reported net income decreased by 17% due to fair value changes in management's ownership of MFS shares and losses on real estate investments[92] - Asset Management AUM increased by 5% from December 31, 2022, driven by net asset value changes and the AAM acquisition, but experienced net outflows of $3.3 billion in Q2'23[96][97] 2. Canada Canada Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 372 | 299 | 73 | 24% | | Reported net income | 210 | 476 | (266) | (56)% | | Wealth sales & asset management gross flows | 3,130 | 3,341 | (211) | (6)% | | Group - Health & Protection sales | 153 | 92 | 61 | 66% | | Individual - Protection sales | 154 | 126 | 28 | 22% | - Underlying net income increased by 24%, reflecting better disability experience in Group - Health & Protection and improved insurance experience in Individual - Protection[99][101] - Reported net income decreased by 56%, primarily due to market-related impacts from interest rates and real estate experience[99] - Group sales increased by 66% due to higher large case sales, and Individual sales increased by 22% from higher participating whole life insurance sales[101] 3. U.S. U.S. Q2'23 vs Q2'22 Financials (US$ millions) | Metric | Q2'23 (US$ millions) | Q2'22 (US$ millions) | Change (US$) | Change (%) | | :---------------------- | :------------------- | :------------------- | :----------- | :--------- | | Underlying net income | 160 | 102 | 58 | 57% | | Reported net income | 133 | 113 | 20 | 18% | | Group - Health & Protection sales | 360 | 168 | 192 | 114.3% | - Underlying net income increased by 57%, driven by strong performance across all businesses, including good premium growth, DentaQuest contributions, higher investment contributions, and favorable experience (medical stop-loss margins, group disability)[103][106] - Reported net income increased by 18%, reflecting the increase in underlying net income and favorable assumption changes and management actions (ACMA), partially offset by a prior year gain on the sale-leaseback of the Wellesley office[103] - U.S. group sales increased by US$192 million, driven by higher dental and medical stop-loss sales[109] 4. Asia Asia Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :----------------- | :--------- | :--------- | | Underlying net income | 150 | 118 | 32 | 27% | | Reported net income | 122 | 7 | 115 | nm | | Wealth sales & asset management gross flows | 1,616 | 3,298 | (1,682) | (51)% | | Individual - Protection sales | 450 | 290 | 160 | 55% | | New business CSM | 118 | 70 | 48 | 68.6% | - Underlying net income increased by 27%, driven by higher premiums and improved expenses and lapse experience in joint ventures for Individual - Protection, partially offset by lower fee-based earnings in Wealth & Asset Management[112][114] - Reported net income increased by $115 million, driven by market-related impacts (interest rates, real estate experience) and the increase in underlying net income[112] - Individual sales were up 55%, driven by higher sales in Hong Kong, China, and India, contributing to a new business CSM of $118 million[117] 5. Corporate Corporate Q2'23 vs Q2'22 Financials | Metric | Q2'23 ($ millions) | Q2'22 (Restated) ($ millions) | Change ($) | Change (%) | | :---------------------- | :----------------- | :---------------------------- | :--------- | :--------- | | Underlying net loss | (113) | (38) | (75) | (197.4)% | | Reported net loss | (95) | 0 | (95) | nm | - Underlying net loss increased due to higher operating expenses (including incentive compensation), increased debt financing costs, and the impact from the sale of Sun Life UK, partially offset by higher investment income from surplus assets[121] - The sale of SLF of Canada UK Limited was completed on April 3, 2023, recognizing a gain of $19 million in reported net income[125] H. Investments Sun Life's general fund invested assets slightly decreased to $165.8 billion by June 30, 2023, mainly due to foreign exchange, offset by fair value gains from declining interest rates, maintaining a diversified portfolio - Total general fund invested assets were $165.8 billion as at June 30, 2023, down $3.0 billion from December 31, 2022, mainly due to unfavorable foreign exchange translation, partially offset by increases in net fair value from declining interest rates[127] Composition of General Fund Invested Assets (June 30, 2023) | Investment Type | Carrying value ($ millions) | % of Total carrying value | | :------------------------------------ | :-------------------------- | :------------------------ | | Debt securities | 72,469 | 44% | | Mortgages and loans | 52,338 | 32% | | Cash, cash equivalents and short-term securities | 10,348 | 6% | | Other invested assets | 11,296 | 7% | | Investment properties | 10,001 | 6% | | Equity securities | 7,187 | 4% | | Derivative assets | 2,178 | 1% | | Total invested assets | 165,817 | 100% | - Debt securities with a credit rating of 'A' or higher represented 72% of the total debt securities, and gross unrealized losses decreased to $7,550 million for FVTPL and $879 million for FVOCI debt securities[131][132] - The mortgage portfolio consisted entirely of commercial mortgages ($14.4 billion), with an uninsured commercial portfolio weighted average loan-to-value ratio of approximately 52%. Impaired mortgages and loans, net of allowances, were $10 million[136][137][139] - The net fair value of derivatives was an asset of $550 million as at June 30, 2023, an increase from a liability of $256 million at December 31, 2022[141] I. Risk Management Sun Life's Risk Management Framework addresses market, insurance, credit, business, operational, and liquidity risks, using hedging and sensitivity analyses to quantify financial impacts - Sun Life's Risk Management Framework covers six major categories: market, insurance, credit, business and strategic, operational, and liquidity risks, with established risk appetite limits for key market risks[146] - The company is exposed to equity risk from segregated fund guarantees, participating insurance contracts, asset management fees, and direct investments, which can impact net income, CSM, and capital[148][149][150] - Interest rate and spread risk arises from insurance and investment contracts with guarantees, managed through an asset-liability management program and hedging strategies using derivatives[151][152] - Real estate risk stems from direct ownership and real estate-backed investments, with fluctuations affecting net income, CSM, and capital[157] 1. Equity Market Sensitivities Estimated Impact of Equity Market Changes (June 30, 2023) | Change in Equity Markets | Potential impact on net income (after tax) ($ millions) | Potential impact on CSM (pre-tax) ($ millions) | Potential impact on LICAT ratio (% point decrease/increase) | | :----------------------- | :------------------------------------------------------ | :--------------------------------------------- | :---------------------------------------------------------- | | 25% decrease | (375) | (625) | 3.0% point decrease | | 10% decrease | (150) | (250) | 1.0% point decrease | | 10% increase | 150 | 225 | 1.0% point increase | | 25% increase | 400 | 575 | 2.5% point increase | 2. Interest Rate Sensitivities Estimated Impact of Interest Rate Changes (June 30, 2023) | Change in Interest Rates | Potential impact on net income (after-tax) ($ millions) | Potential impact on CSM (pre-tax) ($ millions) | Potential impact on OCI ($ millions) | Potential impact on LICAT ratio (% point increase/decrease) | | :----------------------- | :------------------------------------------------------ | :--------------------------------------------- | :----------------------------------- | :---------------------------------------------------------- | | 50 basis point decrease | — | 125 | 225 | 2.0% point increase | | 50 basis point increase | 25 | (125) | (225) | 2.0% point decrease | 3. Credit Spread and Swap Sensitivities Estimated Impact of Credit Spread Changes (June 30, 2023) | Change in Credit Spreads | Potential impact on net income (after tax) ($ millions) | Potential impact on CSM (pre-tax) ($ millions) | Potential impact on OCI ($ millions) | Potential impact on LICAT ratio (% point increase/decrease) | | :----------------------- | :------------------------------------------------------ | :--------------------------------------------- | :----------------------------------- | :---------------------------------------------------------- | | 50 basis point decrease | 75 | 100 | 200 | 1.5% point increase | | 50 basis point increase | (100) | (150) | (200) | 2.0% point decrease | Estimated Impact of Swap Spread Changes (June 30, 2023) | Change in Swap Spreads | Potential impact on net income (after-tax) ($ millions) | | :--------------------- | :------------------------------------------------------ | | 20 basis point decrease | (25) | | 20 basis point increase | 25 | 4. Real Estate Sensitivities Estimated Impact of Real Estate Value Changes (June 30, 2023) | Change in Real Estate Values | Potential impact on net income (after-tax) ($ millions) | Potential impact on CSM (pre-tax) ($ millions) | | :--------------------------- | :------------------------------------------------------ | :--------------------------------------------- | | 10% decrease | (475) | (100) | | 10% increase | 475 | 100 | 5. Segregated Funds Risk & Hedging - Over 90% of segregated fund contracts, measured by fund values, were included in a hedging program as at June 30, 2023, using derivative instruments and fixed income assets to mitigate interest rate and equity market exposure[173] - The hedging strategy is applied at both the line of business and total company levels, using techniques like re-balancing short-dated derivatives and longer-dated put options[174] 6. Additional Cautionary Language and Key Assumptions Related to Sensitivities - Market risk sensitivities are indicative estimates based on specific assumptions and do not account for indirect effects, interactions between risk factors, model error, or changes in other assumptions[176][178] - Actual results can differ materially from these estimates, and the extent of difference generally increases with larger movements in risk variables[178] - Hedging programs may expose the company to other risks, including basis risk, volatility risk, and increased derivative counterparty credit risk, which can impact effectiveness and financial viability[180] J. Additional Financial Disclosure This section details supplementary financial information, including increased total revenue from net investment income, a slight decrease in net insurance contract liabilities, and cash flow activities, alongside historical quarterly results 1. Revenue Q2'23 and YTD 2023 Revenue ($ millions) | Revenue Category | Q2'23 | Q1'23 | Q2'22 (Restated) | YTD 2023 | YTD 2022 (Restated) | | :-------------------- | :----- | :----- | :--------------- | :------- | :------------------ | | Insurance revenue | 5,283 | 5,282 | 4,405 | 10,565 | 8,448 | | Net Investment income (loss) | 449 | 4,800 | (9,151) | 5,249 | (19,692) | | Fee income | 1,936 | 1,901 | 1,779 | 3,837 | 3,618 | | Total revenue | 7,668 | 11,983 | (2,967) | 19,651 | (7,626) | - Total revenue increased by $10.6 billion in Q2'23 compared to the prior year, and by $27.3 billion year-to-date, primarily driven by higher net investment income from fair value changes of assets[184][185] - Foreign exchange translation contributed a $0.2 billion increase in revenue for Q2'23 and $0.6 billion year-to-date[184][185] 2. Changes in the Statements of Financial Position and in Shareholders' Equity - The net liabilities balance for insurance contracts issued was $128.9 billion as at June 30, 2023, a decrease from $131.2 billion at December 31, 2022, mainly due to dispositions and changes in insurance service result[187] - Total shareholders' equity, including preferred shares, was $22.7 billion as at June 30, 2023, an increase from $22.5 billion at December 31, 2022[187] - The change in total shareholders' equity included $1,506 million in total shareholders' net income and $82 million in net unrealized gains on FVOCI assets, partially offset by $863 million in common share dividends and $322 million in unfavorable foreign exchange translation[190] 3. Cash Flows Q2'23 and YTD 2023 Cash Flows ($ millions) | Cash Flow Activity | Q2'23 | Q1'23 | Q2'22 (Restated) | YTD 2023 | YTD 2022 (Restated) | | :------------------------------ | :---- | :---- | :--------------- | :------- | :------------------ | | Operating activities | 289 | 20 | 1,983 | 309 | 1,512 | | Investing activities | 64 | (244) | (2,589) | (180) | (2,641) | | Financing activities | (756) | (264) | 1,261 | (1,020) | 907 | | Changes due to exchange rates | (74) | (33) | 78 | (107) | 14 | | Increase (decrease) in cash and cash equivalents | (477) | (521) | 733 | (998) | (208) | | Net cash and cash equivalents, end of period | 8,374 | 8,851 | 7,485 | 8,374 | 7,485 | - Operating activities generated $289 million in Q2'23 and $309 million year-to-date 2023[188] - Cash flows used in financing activities decreased year-over-year in Q2'23 due to higher borrowing from credit facilities in the prior year[189] 4. Quarterly Financial Results Quarterly Financial Results (Q2'23 to Q3'21) | Metric / Quarter | Q2'23 | Q1'23 | Q4'22 (IFRS 17/9) | Q3'22 (IFRS 17/9) | Q2'22 (IFRS 17/9) | Q1'22 (IFRS 17/9) | Q4'22 (IFRS 4/IAS 39) | Q3'22 (IFRS 4/IAS 39) | Q2'22 (IFRS 4/IAS 39) | Q1'22 (IFRS 4/IAS 39) | Q4'21 (IFRS 4/IAS 39) | Q3'21 (IFRS 4/IAS 39) | | :--------------- | :---- | :---- | :---------------- | :---------------- | :---------------- | :---------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | :-------------------- | | Total revenue ($ millions) | 7,668 | 11,983 | 8,494 | 4,901 | (2,967) | (4,659) | 12,301 | 8,630 | 2,011 | 380 | 12,995 | 8,510 | | Underlying net income ($ millions) | 920 | 895 | 892 | 949 | 808 | 720 | 990 | 949 | 892 | 843 | 898 | 902 | | Reported net income ($ millions) | 660 | 806 | 1,165 | 111 | 930 | 665 | 951 | 466 | 785 | 858 | 1,078 | 1,019 | | Underlying EPS ($) | 1.57 | 1.52 | 1.52 | 1.62 | 1.38 | 1.23 | 1.69 | 1.62 | 1.52 | 1.44 | 1.53 | 1.54 | | Reported EPS ($) | 1.12 | 1.37 | 1.98 | 0.19 | 1.58 | 1.13 | 1.62 | 0.80 | 1.34 | 1.46 | 1.83 | 1.74 | - Q2'23 underlying net income was $920 million, with reported net income at $660 million. This compares to Q2'22 underlying net income of $808 million and reported net income of $930 million (restated under IFRS 17 and IFRS 9)[192] - The report provides a historical overview of financial performance, noting the impact of IFRS 17 and IFRS 9 adoption on comparability with prior periods[191][192] K. Legal and Regulatory Proceedings Sun Life is routinely involved in legal and regulatory matters, with provisions established based on management's assessment, and no significant updates reported - Sun Life is regularly involved in legal actions and inquiries from government and regulatory bodies concerning compliance with insurance, securities, and other laws[201] - Provisions for legal proceedings related to insurance contracts are included in Insurance contract liabilities, while other provisions are established if a payment is probable and reliably estimable[201] - There have been no significant updates to legal and regulatory proceedings since the 2022 Annual Consolidated Financial Statements[201] L. Changes in Accounting Policies Sun Life adopted IFRS 17 and IFRS 9 on January 1, 2023, fundamentally changing insurance contract and financial instrument accounting, especially for CSM and the ECL model 1. Changes in Accounting Policies - Sun Life adopted IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments on January 1, 2023, replacing IFRS 4 and IAS 39, respectively[205][206] - IFRS 17 establishes new principles for the recognition, measurement, presentation, and disclosure of insurance contracts, including the introduction of the Contractual Service Margin (CSM) representing unearned profit[205][208] - IFRS 9 introduces new classification categories for financial assets (FVTPL, FVOCI, amortized cost) and replaces the 'incurred loss' model with a forward-looking 'expected credit loss' (ECL) model for impairment[226][229] - The company elected to apply a classification overlay for financial assets in comparative periods as if IFRS 9 had been effective since January 1, 2022[206] 2. Critical Accounting Policies and Estimates - Significant judgment is required in making assumptions and estimates for accounting policies, particularly for insurance contracts and financial instruments under IFRS 17 and IFRS 9[232] - Key assumptions for insurance contracts include mortality, morbidity, lapse and other policyholder behavior, expenses, and current discount rates, which are regularly reviewed and subject to external actuarial peer review[240][243] - The Risk Adjustment (RA) for non-financial risk is measured as compensation for uncertainty in future cash flow estimates, corresponding to an overall confidence level of approximately 80-85%[241][264] - The Contractual Service Margin (CSM) represents unearned profit recognized as insurance contract services are provided, with its measurement involving interest accretion and changes in fulfillment cash flows related to future service[242][265][266][268] Sensitivities to Insurance Assumptions (As at December 31, 2022) | Sensitivity (where adverse) | Potential impact on CSM (pre-tax) ($ millions) | Potential impact on net income (after-tax) ($ millions) | | :---------------------------------------------- | :--------------------------------------------- | :------------------------------------------------------ | | Policyholder Behaviour (10% increase/decrease) | (850) | 75 | | Life Mortality rates (2% increase) | (75) | (25) | | Annuity Mortality rates (2% decrease) | (175) | 25 | | Morbidity rates (5% incidence increase and 5% termination decrease) | (75) | (175) | | Expenses (5% increase) | (175) | — | M. Internal Control Over Financial Reporting Management maintains effective internal control over financial reporting, modified for IFRS 17 and IFRS 9 implementation, with no material changes believed to have occurred - Management is responsible for establishing and maintaining adequate internal control over financial reporting to ensure reliability and IFRS compliance[280] - Internal controls were modified to reflect key changes from IFRS 17 and IFRS 9 implementations, with a comprehensive enterprise-wide governance structure in place[281][282] - The company believes there have been no material changes to its internal control over financial reporting as a result of adopting the new accounting standards during the period ended June 30, 2023[283] N. Non-IFRS Financial Measures This section defines and reconciles non-IFRS financial measures, providing insights into Sun Life's business performance and long-term earnings potential through adjustments to reported IFRS figures - Underlying net income is a non-IFRS financial measure that adjusts IFRS income to reflect management's view of the company's underlying business performance and long-term earnings potential[290] - Effective January 1, 2023, the definition of underlying net income was refined to update market-related impacts, adjust for management's ownership of MFS shares, and remove intangible asset amortization on acquired finite-life intangibles[291] Q2'23 Underlying Net Income Adjustments ($ millions, after-tax) | Adjustment Category | Q2'23 | Q1'23 | Q2'22 (Restated) | | :---------------------------------------- | :---- | :---- | :--------------- | | Underlying net income | 920 | 895 | 808 | | Market-related impacts | (220) | (64) | 118 | | Assumption changes and management actions | 7 | (5) | (22) | | Other adjustments | (47) | (20) | 26 | | Reported net income | 660 | 806 | 930 | - Additional non-IFRS measures include Assets under management (AUM), Contractual Service Margin (CSM) movement analysis, Financial leverage ratio, and various profitability margins (e.g., pre-tax fee-related earnings margin, pre-tax net operating margin)[300][305][317][321][322] 1. Common Shareholders' View of Reported Net Income - The Drivers of Earnings (DOE) analysis provides additional detail on the sources of earnings, primarily for protection and health businesses, and explains actual results compared to longer-term expectations[285] Q2'23 Reconciliation of Drivers of Earnings to Reported Net Income ($ millions) | Statement of Operations Item | Underlying DOE | Non-underlying adjustments | Common Shareholders' Reported DOE | | :--------------------------- | :------------- | :------------------------- | :-------------------------------- | | Net insurance service result | 794 | (36) | 758 | | Net investment result | 430 | (265) | 165 | | Fee income | - | - | - | | Asset Management | 403 | (76) | 327 | | Other fee income | 80 | 4 | 84 | | Other expenses | (516) | (10) | (526) | | Income before taxes | 1,191 | (383) | 808 | | Income tax (expense) benefit | (235) | 116 | (119) | | Total net income | 956 | (267) | 689 | | Allocated to Participating and NCI | (16) | 7 | (9) | | Dividends and Distributions | (20) | — | (20) | | Underlying net income | 920 | | | | Reported net income - Common shareholders | | (260) | 660 | 2. Underlying Net Income and Underlying EPS - Underlying net income is a non-IFRS financial measure used for management planning and employee incentive compensation, reflecting the company's core business performance and long-term earnings potential by adjusting for certain non-recurring or market-related impacts[290] - Key adjustments to reported net income to arrive at underlying net income include market-related impacts (net interest, non-fixed income investments), assumption changes and management actions (ACMA), and other adjustments (MFS shares, acquisition/restructuring costs, intangible asset amortization, other unusual items)[294] Q2'23 Underlying Net Income and EPS Reconciliation ($ millions, after-tax) | Metric | Q2'23 | Q1'23 | Q2'22 (Restated) | | :---------------------------------------- | :---- | :---- | :--------------- | | Underlying net income | 920 | 895 | 808 | | Market-related impacts | (220) | (64) | 118 | | Assumption changes and management actions | 7 | (5) | (22) | | Other adjustments | (47) | (20) | 26 | | Reported net income - Common shareholders | 660 | 806 | 930 | | Underlying EPS (diluted) ($) | 1.57 | 1.52 | 1.38 | | Market-related impacts ($) | (0.38) | (0.10) | 0.19 | | Assumption changes and management actions ($) | 0.01 | (0.01) | (0.04) | | Other adjustments ($) | (0.08) | (0.04) | 0.17 | | Reported EPS (diluted) ($) | 1.12 | 1.37 | 1.58 | 3. Additional Non-IFRS Financial Measures - Assets under management (AUM) indicates the size of the company's assets across asset management, wealth, and insurance, including general funds, segregated funds, and third-party AUM[300] - The financial leverage ratio measures balance sheet strength as the proportion of capital qualifying debt to total capital, including the contractual service margin (CSM) net of taxes[317] - Pre-tax net operating margin for MFS is calculated by excluding management's ownership of MFS shares and certain offsetting commission expenses to neutralize their impact on profitability[322] - Sales and flows measures include Asset Management gross flows, Group - Health & Protection sales, and Individual - Protection sales, with adjustments for foreign exchange translation to enhance comparability[325] Cash and Other Liquid Assets (As at June 30, 2023) | Asset Category | Amount ($ millions) | | :------------------------------------------------------ | :------------------ | | Cash, cash equivalents & short-term securities | 1,281 | | Debt securities | 1,370 | | Equity securities | 100 | | Sub-total | 2,751 | | Less: Loans related to acquisitions | (704) | | Cash and other liquid assets (held at SLF Inc. and its wholly owned holding companies) | 2,047 | 4. Reconciliations of Select Non-IFRS Financial Measures Q2'23 Pre-tax Reconciliation by Business Group ($ millions) | Business Group | Underlying net income (loss) | Market-related impacts (pre-tax) | ACMA (pre-tax) | Other adjustments (pre-tax) | Tax expense (benefit) on above items | Reported net income (loss) - Common shareholders | | :------------- | :--------------------------- | :------------------------------- | :------------- | :-------------------------- | :----------------------------------- | :----------------------------------------------- | | Asset Management | 296 | (40) | — | (29) | 21 | 248 | | Canada | 372 | (212) | (8) | (1) | 59 | 210 | | U.S. | 215 | (17) | 29 | (65) | 13 | 175 | | Asia | 150 | (30) | (10) | (7) | 19 | 122 | | Corporate | (113) | 1 | — | 13 | 4 | (95) | | Total | 920 | (298) | 11 | (89) | 116 | 660 | Q2'23 Pre-tax Reconciliation for Asset Management Business Unit ($ millions) | Business Unit | Underlying net income (loss) | Other adjustments (pre-tax) | Tax expense (benefit) on above items | Reported net income (loss) - Common shareholders | | :------------ | :--------------------------- | :-------------------------- | :----------------------------------- | :----------------------------------------------- | | MFS | 252 | 4 | (5) | 251 | | SLC Management | 44 | (73) | 26 | (3) | Q2'23 Pre-tax Reconciliation for U.S. Business Unit (US$ millions) | Business Unit | Underlying net income (loss) | Market-related impacts (pre-tax) | ACMA (pre-tax) | Other adjustments (pre-tax) | Tax expense (benefit) on above items | Reported net income (loss) - Common shareholders | | :------------ | :--------------------------- | :------------------------------- | :------------- | :-------------------------- | :----------------------------------- | :----------------------------------------------- | | U.S. | 160 | (10) | 23 | (49) | 9 | 133 | | MFS | 187