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Morningstar | Sun Life Maintains Course in First Quarter

Overall, we think Sun Life’s first quarter was solid, and it largely showed a continuation from results in recent quarters. The annualized underlying ROE of 13% in the quarter is a good result, in our view, but we continue to believe that the company lacks a moat. We will maintain our fair value estimates of CAD 51 and $39.

Sun Life’s performance in its mature markets, Canada and the U.S., was mixed. Underlying net income in Canada dipped 20% year over year, while it increased 16% in the U.S. However, both regions generated good overall returns, with a 14% and 16% annualized underlying ROE in Canada and the U.S., respectively.

Sun Life continues to see good growth in Asia, with insurance sales up 11% year over year in the region, and six of its seven markets up double-digits. The company is laying the groundwork for further growth, with a 35% year-over-year increase in agency headcount in the Philippines, for instance. However, profitability remains an issue, with an annualized underlying ROE of only 9% in the quarter. We remain somewhat skeptical about whether the growth in this region will prove value-creative in the long run.

The asset-management business saw underlying net income decline 2% year over year. Buoyed by a bull market, assets under management improved 3% year over year and saw a nice rebound from the fourth-quarter level. The company experienced net outflows of CAD 6.5 billion in the quarter, a level that is slightly better than its average over the past couple of years. Still, with Sun Life seeing ongoing net outflows, further growth will likely be dependent on an improving market. We think this is a key area to watch, as we believe this is the one area of Sun Life’s operations that potentially has a moat. We would be more attracted to Sun Life if it showed the ability to grow this business organically.