Sun Life Grows on Solid Asia Business Amid Cost Woes

Sun Life Financial SLF has been benefiting from its focus on Asia operations, growing asset management businesses and the scale-up and integration of U.S. operations. Earnings of SLF have risen 5.4% over the last five years.

This third-largest insurer in Canada has a decent earnings surprise history. It surpassed estimates in three of the last four quarters and missed in one, the average earnings surprise being 1.76%.

Sun Life's focus on the emerging economies of Asia that are expected to provide higher returns and the North American markets bodes well for long-term growth. SLF has a strong presence in China, Philippines, India, Hong Kong and Indonesia and has also forayed into Malaysia and Vietnam. Contribution from Asia business to Sun Life's earnings has increased to 21% over the last few years.

Sun Life envisions being one of the top five players and remains focused on growing its voluntary benefits business. The life insurer is also improving its business mix and is thus shifting its growth focus toward products that block lower capital and offer more predictable earnings.

Sun Life Investment Management makes investments in private fixed-income mortgages and real estate. It invests in pension plans and other institutional investors. These are indicative of SLF's efforts to strengthen Asset Management, which provides a higher return on equity, requires lower capital and sees lesser volatility and has the potential for an earnings upside.

Operational efficiency has been aiding Sun Life in building a strong capital position. The life insurer's capital outlay includes a 40-50% dividend payout over the medium term.

However, expenses have increased at Sun Life over the past few years due to high employee expenses, premises and equipment, service fees, amortization of intangible assets and other expenses. These, in turn, weigh on margin expansion. The life insurer remains committed toward balancing both metrics, failing which, the bottom line might suffer. The company estimates integration activities to drive run-rate cost savings of $60 million by 2024.

Nonetheless, SLF's trailing 12-month return on equity was 17.5%, ahead of the industry average of 15.5%. Return on equity, a profitability measure, reflects how effectively a company is utilizing its shareholders' funds. Given the company's ongoing shift to fee-based capital-light businesses, SLF reiterated its medium-term ROE target of 18%.

Also, the return on invested capital in the trailing 12 months was 0.8%, better than the industry average of 0.7%. This reflects SLF's efficiency in utilizing funds to generate income. 

Some Key Industry Players

Other players in the insurance industry are Brighthouse Financial BHF, Reinsurance Group of America, Incorporated RGA and Primerica PRI.

Brighthouse Financial's earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 3.76%.

With an expansive and compelling suite of life and annuity products and a strong market presence, BHF aims to become a premier player in the individual insurance market.  Brighthouse is also revamping its life insurance business to boost annuity sales. Sales of Shield Level annuities and variable annuities with FlexChoice Access should drive Annuity sales.  The insurer remains focused on transitioning the business mix to less capital-intensive products.

Reinsurance Group's earnings surpassed estimates in each of the last four quarters, the average surprise being 20.51%.

RGA has been benefiting from an increase in new business volumes, favorable longevity experience, a stronger invested asset base, business expansion in the pension risk transfer market and effective capital deployment.

Primerica's earnings surpassed estimates in three of the last four quarters and missed in one, the average surprise being 1.74%.

This second-largest issuer of term-life insurance coverage in North America aims to be a successful senior health business while continuing to enhance its shareholders' value. Strong demand for protection products drives sales growth and policy persistency benefit the life insurer. A strong business model makes Primerica well-poised to cater to the middle market's increased demand for financial security.

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