Sun Life Financial(SLF) - 2023 Q3 - Quarterly Report

Q3 2023 Earnings Release Highlights Financial and Operational Highlights Underlying net income decreased 2% to $930 million, while reported net income surged to $871 million, supported by strategic acquisitions and dividend growth Q3 2023 Key Financial Metrics | Profitability | Q3'23 ($ millions) | Q3'22 ($ millions) | | :--- | :--- | :--- | | Underlying net income | 930 | 949 | | Reported net income | 871 | 111 | | Underlying EPS ($) | 1.59 | 1.62 | | Reported EPS ($) | 1.48 | 0.19 | | Underlying ROE (%) | 17.7% | 19.4% | | Reported ROE (%) | 16.6% | 2.3% | - The common share dividend was increased from $0.75 to $0.78 per share[8] - Strategic initiatives in Q3 2023 include: - Completed the acquisition of Dialogue, Canada's leading virtual health and wellness provider - Increased investment in Bowtie, Hong Kong's first virtual insurer - Extended partnership with Teledentistry.com to DentaQuest, providing access to approximately 3.5 million people - SLC Management formed a strategic relationship with Scotiabank Global Wealth Management for private asset solutions[6] - Underlying net income decreased by 2% YoY, driven by a 95% increase in net loss from Corporate expenses & other, which includes higher debt financing costs, partially offset by a 9% increase in Wealth & asset management underlying net income[8][10] - Reported net income increased significantly by $760 million YoY, primarily due to favorable market-related impacts and a $170 million charge in the prior year related to the sale of Sun Life UK[10] Performance by Business Group Asset Management, Canada, and Asia showed strong underlying net income growth, while U.S. declined and Corporate net loss widened Underlying Net Income by Business Segment (Q3'23 vs Q3'22) | | Q3'23 ($ millions) | Q3'22 ($ millions) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Asset Management | 330 | 298 | +11 | | Canada | 338 | 293 | +15 | | U.S. | 185 | 227 | -19 | | Asia | 166 | 153 | +8 | | Corporate | (89) | (22) | -305 | Asset Management - Asset Management's underlying net income increased 11% YoY to $330 million, driven by higher fee-related earnings at SLC Management and higher average net assets at MFS[11][16] Asset Management AUM and Flows (Q3'23) | Metric | MFS (C$ billions) | SLC Management (C$ billions) | Total (C$ billions) | | :--- | :--- | :--- | :--- | | AUM | 754.8 | 219.5 | 974.2 | | Net Flows | (12.5) | 3.4 | (9.1) | - Total Asset Management AUM was $974 billion at the end of Q3'23, with net outflows of $9.1 billion reflecting MFS net outflows of $12.5 billion partially offset by SLC Management net inflows of $3.4 billion[12] - SLC Management entered a strategic partnership with Scotiabank to distribute alternative investment capabilities to the Canadian retail market, aiming to meet growing demand from High-Net-Worth (HNW) investors[14] Canada - Canada's underlying net income rose 15% YoY to $338 million, primarily due to a $34 million increase in Group - Health & Protection from improved disability experience[15][17] Canada Sales Growth (Q3'23 vs Q3'22) | Sales Category | Gross Flows/Sales ($ millions) | YoY Change (%) | | :--- | :--- | :--- | | Wealth sales & asset management | 3,400 | +7 | | Group - Health & Protection | 119 | +4 | | Individual - Protection | 148 | +24 | - Sun Life was selected to advance to the final stages of contract negotiations with the Government of Canada to administer the Canadian Dental Care Plan (CDCP), which could provide dental care access to up to nine million additional Canadians[16] U.S. - U.S. underlying net income decreased 19% YoY to US$140 million, driven by lower Dental results impacted by Medicaid redeterminations and less favorable morbidity experience in Group Benefits[20][27] - U.S. group sales were down 36% YoY to US$179 million, reflecting lower large case Medicaid sales in Dental[21] - The partnership with Teledentistry.com was extended to DentaQuest members, expected to increase access to oral health care for approximately 3.5 million members across 20 states by the end of 2023[22] Asia - Asia's underlying net income increased 8% YoY to $166 million, driven by business growth in Individual Protection reflecting strong sales momentum over the past year[23][28] - Individual sales grew 60% YoY to $521 million, largely due to higher sales in Hong Kong after pandemic-related travel restrictions were lifted, while Wealth sales decreased 34% due to lower money market fund sales in the Philippines[25] - New business Contractual Service Margin (CSM) increased significantly to $238 million from $79 million in the prior year, driven by sales in Hong Kong and High-Net-Worth[25] Corporate - Corporate underlying net loss was $89 million in Q3'23, a significant increase from a $22 million loss in the prior year, driven by the sale of Sun Life UK, higher operating expenses, and increased debt financing costs[30] - Reported net loss was $105 million, an improvement from a $288 million loss in Q3'22, which had included a $170 million impairment charge related to the sale of Sun Life UK[30][31] Management's Discussion and Analysis (MD&A) Financial Summary Sun Life's Q3 2023 and year-to-date financial results are summarized, covering profitability, growth, and financial strength Q3 2023 vs Q3 2022 Financial Summary | Metric | Q3'23 | Q3'22 | | :--- | :--- | :--- | | Underlying net income (millions) | 930 | 949 | | Reported net income (millions) | 871 | 111 | | Underlying EPS ($) | 1.59 | 1.62 | | Reported EPS ($) | 1.48 | 0.19 | | Underlying ROE (%) | 17.7% | 19.4% | | Total AUM (billions) | 1,340.1 | 1,269.4 | Financial Strength as of Q3'23 | Metric | Q3'23 (%) | Jan 1, 2023 (%) | | :--- | :--- | :--- | | SLF Inc. LICAT ratio | 147 | 142 | | Sun Life Assurance LICAT ratio | 138 | 139 | | Financial leverage ratio | 21.8 | 23.7 | Profitability Underlying net income decreased 2% to $930 million, while reported net income surged to $871 million, with year-to-date underlying net income up 11% Reconciliation of Underlying to Reported Net Income (Q3'23 vs Q3'22) | (after-tax) | Q3'23 ($ millions) | Q3'22 ($ millions) | | :--- | :--- | :--- | | Underlying net income | 930 | 949 | | Market-related impacts | 23 | (361) | | Assumption changes and management actions | 35 | (131) | | Other adjustments | (117) | (346) | | Reported net income | 871 | 111 | - Drivers of the 2% YoY decrease in Q3 underlying net income: - Wealth & asset management: Up $38M from higher investment income and fee earnings - Group - Health & Protection: Up $4M, with strong US revenue growth offset by US health experience - Individual - Protection: Down $8M due to the sale of Sun Life UK - Corporate expenses & other: $53M increase in net loss, including higher debt financing costs[49] - Year-to-date underlying net income increased 11% YoY, primarily driven by a $306 million increase in Group - Health & Protection, reflecting strong premium growth and the DentaQuest contribution[56] Growth Individual protection sales surged 51% in Q3 2023, while wealth and group health sales declined, and total AUM increased 2% to $1.34 trillion Sales and Gross Flows (Q3'23 vs Q3'22) | | Q3'23 ($ millions) | Q3'22 ($ millions) | YoY Change (%) | | :--- | :--- | :--- | :--- | | Wealth sales & asset management gross flows | 39,324 | 42,146 | -7 | | Group - Health & Protection sales | 374 | 499 | -25 | | Individual - Protection sales | 669 | 444 | +51 | | New business CSM | 370 | 177 | +109 | - Total AUM increased by $21.6 billion (2%) from December 31, 2022, to $1.34 trillion, primarily driven by favorable market movements of $40.6 billion, partially offset by net outflows of $15.5 billion[68] - Q3 2023 saw total net outflows of $10.5 billion from segregated funds and third-party AUM, mainly from MFS net outflows of $12.5 billion, which were partially offset by SLC Management net inflows of $3.4 billion[69] Contractual Service Margin (CSM) Total CSM increased 5% to $11.5 billion in the first nine months of 2023, driven by strong new business sales and favorable assumption changes - Total CSM ended Q3'23 at $11.5 billion, an increase of $0.6 billion or 5% for the first nine months of 2023[72] - Key drivers of CSM movement in the first nine months of 2023: - Organic CSM movement: +$711 million, driven by new business from strong individual protection sales in Asia and Canada - Impact of change in assumptions: +$287 million, including favorable mortality and model refinements - Disposition: -$262 million reduction from the sale of Sun Life UK[72][73] - In Q3'23, assumption changes and management actions (ACMA) increased reported net income by $35 million but decreased the pre-tax CSM by $43 million, with notable changes including unfavorable policyholder behavior updates in Asia and Canada, offset by favorable modeling enhancements[75][76] Financial Strength Sun Life maintained strong financial strength in Q3 2023, with SLF Inc.'s LICAT ratio at 147% and total capital increasing $1.0 billion to $41.6 billion Key Financial Strength Ratios | | Q3'23 | Jan 1, 2023 | | :--- | :--- | :--- | | SLF Inc. LICAT ratio (%) | 147 | 142 | | Sun Life Assurance LICAT ratio (%) | 138 | 139 | | Total capital ($ millions) | 41,596 | 40,628 | | Financial leverage ratio (%) | 21.8 | 23.7 | - SLF Inc.'s LICAT ratio increased five percentage points to 147% since January 1, 2023, driven by reported net income and capital optimization, partially offset by dividends, debt redemption, and share buybacks[82] - Capital transactions during the period included the issuance of $500 million in subordinated debentures and the redemption of $1 billion in subordinated debentures[87][88] - During Q3, SLF Inc. purchased approximately 2.8 million common shares for $186 million under its Normal Course Issuer Bid (NCIB)[91] Performance by Business Segment Q3 2023 saw Canada, Asset Management, and Asia drive earnings growth, while the U.S. segment declined 19% and Corporate net loss widened significantly 1. Asset Management - Asset Management's Q3'23 underlying net income increased 11% YoY to $330 million, driven by a 17% increase in SLC Management's fee-related earnings and higher average net assets at MFS[96][99] Asset Management AUM and Flows (Q3'23) | Metric | MFS (C$ billions) | SLC Management (C$ billions) | Total (C$ billions) | | :--- | :--- | :--- | :--- | | AUM | 754.8 | 219.5 | 974.2 | | Net Flows | (12.5) | 3.4 | (9.1) | 2. Canada - Canada's Q3'23 underlying net income grew 15% YoY to $338 million, reflecting improved disability experience in Group Health & Protection and higher investment income in Wealth & Asset Management[102][104] - Sales growth was strong across the board in Q3'23 vs Q3'22: - Wealth sales & asset management gross flows: +7% - Group - Health & Protection sales: +4% - Individual - Protection sales: +24%[104] 3. U.S. - U.S. Q3'23 underlying net income decreased 19% YoY to US$140 million, driven by lower Dental results due to Medicaid redeterminations and less favorable morbidity experience in Group Benefits[106][109] - Group sales in the U.S. decreased by 36% YoY to US$179 million, reflecting lower large case Medicaid sales in Dental[112] 4. Asia - Asia's Q3'23 underlying net income increased 8% YoY to $166 million, driven by business growth in Individual Protection, which saw favorable mortality from lower claims volumes[115][118] - Individual protection sales surged 57% YoY to $521 million, driven by higher sales in Hong Kong as pandemic travel restrictions were lifted, and New business CSM grew to $238 million from $79 million in the prior year[119] 5. Corporate - Corporate underlying net loss was $89 million in Q3'23, compared to a $22 million loss in Q3'22, with the increased loss driven by the sale of Sun Life UK, higher operating expenses, and increased debt financing costs[123] - Reported net loss improved to $105 million from $288 million loss in the prior year, which had included a $170 million impairment charge related to the sale of Sun Life UK[123][125] Investments Total general fund invested assets were $162.8 billion, down from year-end 2022, with a high-quality, diversified portfolio including 99% 'BBB' or higher debt securities General Fund Invested Assets Composition (as of Sep 30, 2023) | Asset Type | Carrying Value ($ millions) | % of Total | | :--- | :--- | :--- | | Debt securities | 68,879 | 43% | | Mortgages and loans | 51,994 | 32% | | Cash, cash equivalents and short-term securities | 11,026 | 7% | | Other invested assets | 11,955 | 7% | | Investment properties | 9,952 | 6% | | Equity securities | 7,080 | 4% | | Derivative assets | 1,878 | 1% | | Total invested assets | 162,764 | 100% | - The debt securities portfolio remains high quality, with 71% rated 'A' or higher and 99% rated 'BBB' or higher as of September 30, 2023[130] - The commercial mortgage portfolio's largest exposure is to multi-family residential properties (35%), and the uninsured portion of the portfolio had a weighted average loan-to-value ratio of approximately 52%[135] Risk Management This section details Sun Life's market risk exposure and management, providing sensitivity analyses on net income, CSM, and LICAT ratio for equity and interest rate shocks Equity Market Sensitivities (as of Sep 30, 2023) | Change in Equity Markets | Potential impact on net income (after tax, $ millions) | Potential impact on CSM (pre-tax, $ millions) | | :--- | :--- | :--- | | 25% decrease | (400) | (575) | | 10% decrease | (150) | (225) | | 10% increase | 175 | 200 | | 25% increase | 425 | 525 | Interest Rate Sensitivities (as of Sep 30, 2023) | Change in Interest Rates | Potential impact on net income (after-tax, $ millions) | Potential impact on CSM (pre-tax, $ millions) | | :--- | :--- | :--- | | 50 basis point decrease | (25) | 75 | | 50 basis point increase | 25 | (100) | - The company uses a variety of methods to manage market risk, including duration management, scenario testing, and hedging programs, with Over 90% of segregated fund contracts, as measured by fund values, included in a hedging program as of September 30, 2023[159][174] Changes in Accounting Policies Effective January 1, 2023, Sun Life adopted IFRS 17 and IFRS 9, significantly changing accounting for insurance contracts and financial instruments, including the introduction of CSM - The company adopted IFRS 17 Insurance Contracts and IFRS 9 Financial Instruments on January 1, 2023[206] - Key changes under IFRS 17 include: - Introduction of the Contractual Service Margin (CSM) to represent unearned profit, which is recognized over the service period - Use of discount rates based on the characteristics of the insurance contracts, not the supporting assets - Separate presentation of insurance revenue, service expenses, and finance income/expenses[216][220][223] - Key changes under IFRS 9 include: - A new classification model for financial assets (FVTPL, FVOCI, or amortized cost) based on the business model and cash flow characteristics - Replacement of the 'incurred loss' model with a forward-looking 'expected credit loss' (ECL) model, leading to earlier recognition of credit losses[229][232] Non-IFRS Financial Measures This section defines and reconciles non-IFRS financial measures like 'Underlying Net Income', which adjusts reported net income for market impacts and assumption changes, along with other key metrics - Underlying net income is a key non-IFRS measure that removes the following from reported net income: - Market-related impacts (differences between actual vs expected market movements) - Assumption changes and management actions (ACMA) - Other adjustments such as acquisition/integration costs and management's ownership of MFS shares[295][297] Reconciliation of Underlying to Reported Net Income (Q3'23) | (after-tax) | Q3'23 ($ millions) | | :--- | :--- | | Underlying net income | 930 | | Market-related impacts | 23 | | Assumption changes and management actions | 35 | | Other adjustments | (117) | | Reported net income | 871 | - Other important non-IFRS measures used by management include Assets Under Management (AUM), sales and gross flows, Return on Equity (ROE), financial leverage ratio, and various metrics related to the Contractual Service Margin (CSM)[304] Interim Consolidated Financial Statements (Unaudited) Consolidated Statements of Operations The Consolidated Statements of Operations details revenues, expenses, and profits, reporting total revenue of $2.4 billion and net income of $871 million Consolidated Statement of Operations Highlights (Three months ended Sep 30) | | 2023 ($ millions) | 2022 (restated, $ millions) | | :--- | :--- | :--- | | Total revenue | 2,439 | 4,901 | | Total net income (loss) | 937 | 153 | | Common shareholders' net income (loss) | 871 | 111 | | Diluted EPS ($) | 1.48 | 0.19 | Consolidated Statements of Financial Position The Consolidated Statements of Financial Position shows total assets of $313.8 billion, total liabilities of $290.1 billion, and total equity of $23.8 billion Consolidated Balance Sheet Highlights | | Sep 30, 2023 ($ millions) | Dec 31, 2022 (restated, $ millions) | | :--- | :--- | :--- | | Total general fund assets | 193,858 | 198,316 | | Total assets | 313,846 | 323,608 | | Total general fund liabilities | 170,091 | 175,429 | | Total liabilities | 290,079 | 300,721 | | Total equity | 23,767 | 22,887 | Consolidated Statements of Cash Flows Net cash provided by operating activities was $2.2 billion, while investing and financing activities used cash, resulting in a net decrease of $436 million Cash Flow Summary (Nine months ended Sep 30, 2023) | | 2023 ($ millions) | | :--- | :--- | | Net cash provided by operating activities | 2,209 | | Net cash used in investing activities | (318) | | Net cash used in financing activities | (2,447) | | Increase (decrease) in cash and cash equivalents | (436) | Condensed Notes to the Interim Consolidated Financial Statements These notes detail accounting policies, IFRS 17 and IFRS 9 adoption impacts, acquisitions, dispositions, segmented information, financial instrument risks, and capital management - Note 2 provides an extensive summary of the adoption of IFRS 17 and IFRS 9, detailing significant differences from previous standards (IFRS 4 and IAS 39) in scope, measurement, and presentation of insurance contracts and financial instruments[363][369][445] - Note 3 details recent acquisitions and dispositions, including the agreement to acquire Dialogue Health Technologies, the completed sale of SLF of Canada UK Limited, and the acquisition of a 51% interest in Advisors Asset Management Inc. (AAM)[573][574][580] - Note 10 details capital management activities, including the launch of a Normal Course Issuer Bid (NCIB) to purchase up to 17 million common shares, and the issuance and redemption of subordinated debentures[721][726][728]