Sun Life Financial (SLF), Canada’s third-largest insurer, is experiencing significant growth driven by its strategic focus on Asia operations, asset management expansion, and the successful integration of its U.S. operations. Over the past five years, SLF’s earnings have risen by 5.4%, demonstrating its consistent profitability. The company has a history of exceeding earnings estimates, surpassing expectations in three of the last four quarters.
SLF’s commitment to emerging economies in Asia, recognized for their potential for higher returns, and its presence in North American markets form the foundation for its long-term growth strategy. With a strong presence in key Asian markets like China, Philippines, India, Hong Kong, and Indonesia, SLF has also made inroads into Malaysia and Vietnam. The contribution from its Asian operations to SLF’s earnings has climbed to 21% in recent years, highlighting the importance of this region for the company’s success.
Sun Life aims to be a top five player in the industry and is dedicated to expanding its voluntary benefits business. The company is also strategically shifting its business model towards capital-light products that provide more predictable earnings. This shift is exemplified by Sun Life Investment Management, which focuses on investments in private fixed-income mortgages, real estate, pension plans, and other institutional investors. These investments contribute to a higher return on equity, require lower capital, and offer lower volatility, leading to potential earnings upside.
Operational efficiency has allowed SLF to establish a robust capital position. The company’s capital allocation includes a dividend payout of 40-50% over the medium term. While SLF’s commitment to balancing its operational efficiency with its capital allocation is evident, expenses have increased in recent years due to higher employee expenses, premises and equipment costs, service fees, and other factors. These cost pressures can hinder margin expansion, and the company recognizes the importance of addressing this challenge to maintain profitability. SLF estimates that its integration activities will generate run-rate cost savings of $60 million by 2024.
Despite these expenses, SLF’s trailing 12-month return on equity (ROE) of 17.5% surpasses the industry average of 15.5%. ROE is a crucial profitability metric that reflects how effectively a company utilizes its shareholders’ funds. As the company continues its transition towards fee-based, capital-light businesses, it has reiterated its medium-term ROE target of 18%. Furthermore, SLF’s trailing 12-month return on invested capital (ROIC) of 0.8% exceeds the industry average of 0.7%, demonstrating its efficient use of funds to generate income.
Other key players in the insurance industry include Brighthouse Financial (BHF), Reinsurance Group of America, Incorporated (RGA), and Primerica (PRI). Brighthouse Financial, with its comprehensive suite of life and annuity products and strong market presence, aims to become a leading player in the individual insurance market. The company is also focusing on revitalizing its life insurance business to enhance annuity sales. Reinsurance Group has consistently exceeded earnings estimates in recent quarters, driven by increased new business volumes, favorable longevity experience, a strengthened investment asset base, and expansion into the pension risk transfer market. Primerica, the second-largest issuer of term-life insurance coverage in North America, is committed to building a successful senior health business while maximizing shareholder value. Strong demand for protection products fuels sales growth, and policy persistency benefits the life insurer. Primerica’s robust business model positions it well to meet the growing demand for financial security in the middle market.
