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REFINITIV STREETEVENTS

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SLF.TO - Q4 2021 Sun Life Financial Inc Earnings Call

EVENT DATE/TIME: FEBRUARY 10, 2022 / 3:00PM GMT

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FEBRUARY 10, 2022 / 3:00PM, SLF.TO - Q4 2021 Sun Life Financial Inc Earnings Call

C O R P O R A T E P A R T I C I P A N T S

Daniel Fishbein Sun Life - President of Sun Life U.S.

Ingrid Johnson Sun Life - President of Sun Life Asia

Jacques Goulet Sun Life - President, Sun Life Canada

Kevin Strain Sun Life - President & CEO Director

Kevin Morrissey Sun Life - Chief Actuary & Senior VP

Manjit Singh Sun Life - Executive VP & CFO

Michael Roberge Sun Life - CEO & President of MFS Investment Management

Steve Peacher Sun Life - President of SLC Management

Yaniv Bitton Sun Life - VP, Head of IR & Capital Markets

C O N F E R E N C E C A L L P A R T I C I P A N T S

David Kenneth Motemaden Evercore ISI Institutional Equities, Research Division - MD & Fundamental Research Analyst Doug Young Desjardins Securities Inc., Research Division - Diversified Financials and Insurance Analyst

Gabriel Dechaine National Bank Financial, Inc., Research Division - Analyst

Humphrey Lee Dowling & Partners Securities, LLC - Research Analyst

Lemar Persaud Cormark Securities Inc., Research Division - Research Analyst

Meny Grauman Scotiabank Global Banking and Markets, Research Division - MD of Financial Services Equity Research & Analyst Nigel R. D'Souza Veritas Investment Research Corporation - Investment Analyst

Paul David Holden CIBC Capital Markets, Research Division - Executive Director of Institutional Equity Research

Scott Chan Canaccord Genuity Corp., Research Division - Director of Research of Financials & Financial Services Analyst Tom MacKinnon BMO Capital Markets Equity Research - MD & Analyst

P R E S E N T A T I O N

Operator

Good morning, everyone. My name is Justin, and I will be your conference operator today. At this time, I would like to welcome everyone to Sun Life Financial Q4 2021 Financial Results Conference Call. (Operator Instructions) The host of the call is Yaniv Bitton, Vice President, Head of Investor Relations and Capital Markets. Please go ahead, Mr. Bitton.

Yaniv Bitton - Sun Life - VP, Head of IR & Capital Markets

Thank you, Justin, and good morning, everyone. Welcome to Sun Life's Earnings Call for the fourth quarter of 2021. Our earnings release and the slides for today's call are available on the Investor Relations section of our website at sunlife.com. We will begin today's call with an overview of the fourth quarter and full year results from Kevin Strain, President and Chief Executive Officer. Following Kevin's remarks, Manjit Singh, Executive Vice President and Chief Financial Officer, will present the financial results for the quarter.

After the prepared remarks, we will move to the question-and-answer portion of the call. Other members of management will also be available to answer your questions this morning.

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FEBRUARY 10, 2022 / 3:00PM, SLF.TO - Q4 2021 Sun Life Financial Inc Earnings Call

Turning to Slide 2. I draw your attention to the cautionary language regarding the use of forward-looking statements and non-IFRS financial measures, which form part of today's remarks. As noted in the slides, forward-looking statements may be rendered inaccurate by subsequent events. With that, I'll now tuthings over to Kevin.

Kevin Strain - Sun Life - President & CEO Director

Thank you, Yaniv. Turning to Slide 4. We delivered solid fourth quarter results with reported net income up 45% to approximately $1.1 billion and underlying net income up 4% to $898 million. Growth in underlying net income was strong across Asset Management and Asia both up 18% on a constant currency basis and also in Canada, which was up 9% over the prior year. U.S. underlying earnings were down approximately 50%, mostly reflecting adverse COVID-19 mortality experience. U.S. infection and mortality rates related to COVID-19 remained elevated and as a result, we continue to see significantly higher-than-expected mortality in the working age population. We also saw elevated mortality in Asia, mostly in the Philippines.

Our capital position remains strong, ending the year at 145% LICAT for SLF and cash at the holding company of $4.7 billion. In November, following the lift of regulatory restrictions for all federally regulated institutions, we announced a 20% increase to our common share dividend, reinforcing our commitment to provide strong returns to shareholders.

Turning to Slide 5. We had strong full year results in 2021, closing the year with reported net income up 64% to $3.9 billion, driven by favourable market-related impacts and a $297 million gain on the IPO of our India Asset Management Joint Venture. Underlying net income was up 10% to $3.5 billion at the high end of our medium-term objective of 8% to 10% growth. 2021 underlying ROE of 15.4% was also strong, moving towards our 16% plus medium-term objective. And we ended the year with $1.4 trillion in assets under management.

We also had strong growth across our businesses in 2021. SLC Management had $32.5 billion of net inflows in the year and MFS ended the year with record AUM of US $693 billion. Individual insurance sales grew 36% in Canada and U.S. Group Benefits sales grew 13% in constant currency. Sales in Asia were strong outside of International Hubs and total Asia wealth sales were up 51% in constant currency. These results were achieved while managing through profound impacts from the COVID-19 pandemic.

Since the start of the pandemic, we have paid almost $900 million in COVID-related claims.

We are proud to be there for our Clients when they needed us the most. The pandemic has also had significant impact on mental health, and we continue to identify ways to help our Clients and our people work through these issues. We also demonstrated resilience through lockdowns and movement restrictions in the various geographies that we do business and we are constantly innovating to bring new digital solutions to our Clients.

And of course, the pandemic is not over as Omicron spreads around the world, we continue to see higher COVID incidence rates. And unfortunately, in cases where vaccine rates are lower, we are also seeing continued mortality. The pandemic has also disrupted supply chains and drove unprecedented stimulus from governments. These factors, among others, are driving higher inflation rates. Our diversified business mix is well suited to manage in an inflationary environment through continued business growth, disciplined expense management and pricing actions.

Inflation is also usually followed with higher interest rates. Steadily rising interest rates, particularly at the long end of the curve, are good for insurers and should provide profitability support over the medium term.

Turning to Slide 6. Our Purpose is more important now than it has ever been. People are focused on their health and long-term financial security like never before. This quarter, we delivered on key elements of our strategy. MFS maintained strong performance for Clients with 97%, 96% and 80% of MFS's U.S. retail mutual fund assets ranked in the top half of their Morningstar categories based on 10-, 5- and 3-year performance, respectively.

Canada continued to deliver on health outcomes, expanding our partnership with CloudMD to help Clients manage their mental health with our new Mental Health Coach. Many Canadians continue to struggle with mental health yet a Sun Life study found that over half are not seeking care.

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FEBRUARY 10, 2022 / 3:00PM, SLF.TO - Q4 2021 Sun Life Financial Inc Earnings Call

CloudMD and our Mental Health Coach use data analytics to identify at-risk Clients and proactively reaches out to guide them to the right resources and support.

In the U.S., we continue to enhance our digital capabilities to make it easier for Clients to get the benefits they need. In 2021, this supported record U.S. Group Benefits sales of US $1.2 billion. In Asia, we're delivering on distribution excellence, where bancassurance sales in Vietnam have more than tripled compared to the prior year while continuing to invest in health solutions like Bowtie, Hong Kong's first digital insurer, positioning it to expand across Asia.

Sustainability is an imperative for Sun Life, and 2021 was a pivotal year for us. We achieved carbon neutrality across our global operations. And for the 13th consecutive year, Sun Life was recognized among the global 100 most sustainable corporations in the world, sharing the #1 position among insurance companies globally.

BGO is a great example of the type of investments we are making in sustainability. BGO was recently awarded the 2021 Outstanding Building of the Year Award for industry leadership and excellence in building management related to one of our retail and office complexes in Toronto. This 10-story building uses state-of-the-art artificial intelligence analytics that generated energy savings equivalent to the annual energy use of 442 North American homes. It also reduced carbon emissions by approximately 3.8 million kilograms over the course of 2020. Finally, Sun Life was recently certified as a great place to work in Canada and the U.S., adding to our previous certifications in the Philippines and our Asia Service Center in India.

Turning to Slide 7. Digital leadership is a key priority for Sun Life, and we continue to shift the organization to think and act like a digital company. Our digital strategy is centered on 3 areas: digital experiences, digital capabilities and digital ways of working. In Canada, our digital coach, Ella, continues to deliver meaningful outcomes for our Clients, driving nearly $700 million in additional wealth deposits and $950 million in insurance coverage sold this year. This is another example of how we are helping Canadians save for their future and ensure their families and loved ones have the protection and financial security they need.

In the U.S., we launched Sun Life Link, a broad portfolio of digital connection solutions to enable easier interactions with plan sponsors, reducing manual work and increasing operational efficiencies, allowing players to spend more time on things that matter to their employees.

Digital adoption is also a focus in Asia with 71% of new business applications submitted digitally in 2021, up 48 percentage points compared to the prior year.

We're making it easier for Clients to do business with us, especially during times where face-to-face connections are more difficult. We are empowering our people to support the digital journey by providing flexibility through a hybrid work model and increasing the number of agile practitioners by 63% over the last year. These are just some of the ways we continue advancing digital experiences and capabilities across our businesses, and we will be sharing more on our progress throughout the year.

Finally, reflecting on this past year and my first 6 months as CEO, I'm extremely proud of what we've accomplished. We are well positioned for growth, and we have a clear compelling strategy with a strong track record of execution. We continued to effectively manage capital with over 10 strategic transactions in 2021, including the acquisition of Pinnacle Care, the IPO of our India Asset Management Joint Venture and our intention to purchase DentaQuest, and we remain committed to our Purpose and to creating positive financial and health outcomes for our Clients. I also want to thank all of our employees and advisers around the world for everything they have done this year to help our Clients achieve lifetime financial security and live healthier lives. With that, I will now tuthe call over to Manjit, who will take us through the fourth quarter financial results.

Manjit Singh - Sun Life - Executive VP & CFO

Well, thank you, Kevin, and good morning, everyone. Slide 9 provides an overview of our fourth quarter results. The results once again demonstrate the resilience of our diversified business model. Our wealth and asset management businesses delivered strong results driven by good net flows and favourable market conditions.

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FEBRUARY 10, 2022 / 3:00PM, SLF.TO - Q4 2021 Sun Life Financial Inc Earnings Call

On the protection side, fundamental business activity was strong while COVID-19-related mortality and morbidity experience remained elevated in the quarter. Reported net income in the quarter was nearly $1.1 billion. This included higher investment property valuations, reflecting the value our investment team has created from repositioning the portfolio over the past few years. Reported net income also included a $297 million gain from the IPO of our India Asset Management Joint Venture. This was partially offset by an increase to acquisition-related liabilities at SLC Management, largely reflecting higher expected earnings at the time of buy up of the remaining interest in affiliates.

Underlying net income of $898 million and underlying earnings per share of $1.53 increased 4%, driven by broad-based growth across our business groups. COVID-19 related impacts of approximately $110 million in the quarter was largely offset by a lower effective tax rate, reflecting higher tax-exempt income and the release of a tax revision resolution of prior year's tax matters. Underlying retuon equity was 15% in the quarter and 15.4% for the full year, marking the first time our underlying ROE has crossed 15% on a full year basis. Assets under management grew to over $1.4 trillion, reflecting market value growth and another strong quarter of net flows at SLC Management. For the year, SLC Management assets under management were up nearly $70 billion, driven by strong net flows and the Crescent acquisition.

Our wealth and asset management businesses in Canada and Asia also delivered strong AUM growth, up $14 billion from the prior year. Book value per share increased 8% over the prior year, excluding impacts and other comprehensive income, book value per share was up 12%. Our capital position remains strong with LICAT ratios of 145% at SLF and 124% at SLA. The financial leverage ratio increased to 25.5% and cash at the holding company increased to $4.7 billion, both reflecting the $2 billion subordinated debt offering we did in the quarter.

Slide 10 outlines the performance of our business groups. Asset Management reported net income of $140 million was down from the prior year, reflecting a $153 million charge for SLC Management acquisition-related liabilities. The increase in the liability largely reflects higher growth expectations. Accordingly, we are increasing our Investor Day target for 2025 underlying net income by approximately $10 million to $235 million. Asset Management delivered record underlying net income of $382 million, driven by a 14% increase at MFS and an 18% increase at SLC Management.

Canada's reported net income of $356 million was driven by higher real estate valuations and equity market growth. Underlying net income of $266 million was up 9%, reflecting strong expected profit growth and favourable expense experience. This was partially offset by a $20 million investment impairment and unfavourable disability experience.

U.S. reported net income of US $68 million was up slightly from the prior year as gains on real estate investments were mostly offset by lower underlying net income. Underlying net income of US $56 million was down from US $112 million in the prior year. The fourth quarter results included US $66 million of COVID-19-related impacts as the working age population infections and mortality remained elevated. We expect pandemic-related headwinds to persist for the first quarter of 2022.

That being said, the core fundamentals of the U.S. Group businesses are strong. We have maintained high persistency level and are generating good premiums growth. We have enhanced our product and digital capabilities, pricing for new business remains firm, and we've added key talent to support our growth strategy. In Asia, reported net income was $446 million, which includes the gain from the India Asset Management IPO.

Underlying net income of $130 million was up 18% on a constant currency basis. While we continue to face challenging conditions in some markets, overall business fundamentals were strong. Total expected profit and new business gains were up 20% on a constant currency basis. This was partially offset by $12 million of COVID-19 related experience, primarily in the Philippines. Reported and underlying net income in corporate were both up, driven by a lower effective tax rate in the quarter, partially offset by higher expenses.

On Slide 11, we include an updated view of our sources of earnings, reflecting 2 changes we made to provide more meaningful information. We've included the sources of earnings on an underlying net income basis, and we have reflected the Asset Management pillar on a separate line in the sources of earnings. Expected profit increased 6% on a constant currency basis, reflecting business growth and market-driven gains. Notably, Canada expected profit grew 9% and Asia expected profit grew 14% in constant currency.

Experience gains on a reported basis improved by $126 million driven by favourable market impacts that were partially offset by experienced losses. On an underlying basis, higher experience losses were primarily driven by COVID-19-related mortality and morbidity. Earnings on surplus was down from the prior year, driven by lower AFS and seed investment gains.

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