Sun Life Financial: A High-Dividend Insurer For A High-Rate Environment (NYSE:SLF)

Introduction

Sun Life Financial Inc. (NYSE:SLF) is a buy today given their diverse asset mix, a rising interest rate environment, proven execution by management, and cost improvement in digital client outcomes. SLF is a Canadian financial and insurance company.Services company with operations worldwide in 25 countries. The company’s core competencies include wealth management and insurance sales. SLF has more than $1.4T in AUM(All figures are in Canadian Dollars unless noted otherwise) and includes business segments grouped by geography, including Canada, U.S.A., Asia. They also define key business segments for Asset Management and Corporate.

SLF offers group and health insurance services in the U.S. SLF Asia defines key business units via both local markets and cross-border offerings. The local market segment focuses on life and medical insurance within country borders, as well as wealth and asset management solutions. SLF offers wealth management solutions and insurance options across countries in the APAC region. SLF has MFS and SLC Management as its asset management subsidiaries. MFS provides asset management solutions. SLC Management is an institutional management business that offers alternative investment options. SLF is the only Canadian insurance provider Among the top 100The world’s most sustainable corporations

Industry and Competitive Analysis

The company’s sales mix can thrive in a high rate environment because it is varied. The Bank of Canada continues to forecast higher rates for their life insurance segment. This is similar to other competitors. The bank’s head stated that hes aware of the industry conference on April 21. It’s not impossible to ignore anythingConcerning a 75 basis point rate increase. As shown below, the 10 largest Canadian insurers have always succeeded when the 10-year rates have risen. SLF has They invest 99% of their premiums from policyholdersIn investment grade bonds, this ensures safety while the gap between treasuries and premiums increases in the short-term. SLF’s global operating segment, which accounts for 55% or more of operating income, is poised to continue its success in their core competency.

Sun Life’s key competitors are Prudential plc, Manulife Financial (MFC), and Aflac Inc. These competitors are also available worldwide, but SLF is more likely to grow due to its APAC focus and operating efficiency. SLF boasts 2^ndThe company has the highest gross profit as percentage of revenue. This proves that they extract more value than their competition. SLF also has a high revenue per share, which is a key indicator of capital structure. This allows them to have a greater impact on stock buybacks.

SLF’s focus is on APAC growth. Growing fasterDeveloped nations. SLF is also more well-known than its competitors. Long-standing operations in Hong Kong and the PhilippinesFor over 100 years, they have been able penetrate and grow in APAC markets quickly. This is most evident in Vietnam where they moved from 13^ThTo 6^ThThey will continue to grow in insurance sales between 2020 and 2021. They also recently A key distribution agreement in Indonesia was expandedThis is a strong indicator that the region remains a focus area.

Asset Management Business Improves

SLF’s asset management business continues its growth. The company quietly increased net income guidance to SLC, one of its wholly-owned asset management subsidiaries, from $225M in 2025 to $235M by 2025. Although it is not a significant increase, SLF believes that its fee-driven asset managing business is well positioned for value creation. SLC continues receiving high praise from its employees due to its rating as an excellent company. 2021 is the best place to workThe service is appreciated by clients and employees, with inflows rising to more than $32B in 2021.

Brookfield Asset Management, their competitor, announced recently that it could spin off its fee-earning business at a 25-40x multiplier depending on demand. This segment could generate more income than the market expects in the medium-term if SLF can increase asset management growth. MFS continues to shine in the U.S., with 96% ranking in the top 50 of Morningstar’s 5-year historical performance. This asset management arm also Attained 43%As digital client service began to be streamlined, this resulted in a 2% increase in operating profit ratio in 2021.

Risk Profile

Interest rate risks and COVID-19 are the most significant risks for insurers right now. Although interest rates are rising globally, historically, rates have trended down and SLF has been adversely affected. Their risk team examines credit spread risk. They note that rate hikes don’t positively impact earnings, but rate drops do negatively impact the business. Although the company does have investment grade bonds to hedge its policies, there are still risks associated with rapidly falling rates.

The second major impact is the global COVID-death potential increases that could affect premium payouts. Global The payouts rose up to $5.5BIn 2021, payouts will increase by $3.5B from a year ago. This was due to two countries (India & the United States) where SLF has significant business. SLF is diversifying the life insurance business by focusing it’s growth on smaller markets, such as Vietnam and Malaysia. Due to their size, the U.S.A. and India are more lucrative than other countries, so this risk cannot be mitigated. The company has a wealth of experience. LICAT ratio of 143%They have sufficient capital to use, at a level that is well above the minimum regulatory requirement of 90%. SLF’s consistent dividend yield and consistency are superior to peers. Additionally, they have repaid shareholders for more than 20 consecutive years. However, execution risk cannot always be fully accounted.

Forecast

SLF recently released their FY2021 results, and their forecasts for the next year. They reported over $1B Q4 net income and outlined a plan to increase earnings at an average 8-10% per year, slightly less than their previous 5-year earnings growth of 10%. I believe that this management projection is an example of under promising and overdelivering.

SLF has also increased the number of digitally processed claims which has resulted in a reduction in overhead. 93% of consumer insurance applications were submitted online in Q4, 83% of consumer wealth transactions were made online and 96% of group and individual dental claims were processed electronically. Their efforts to improve digital outcomes continue to pay off with sales and general admin expenses decreasing by 23% compared to revenue growth of 39% over three years. SLF is committed improving customer satisfaction via online service and recently committed $48M to Dialogue Health Technologies Inc. a digital operations leader that powers their internal Lumino Health Virtual Care Platform.

Fundamentals are Upside Down

Given the complexity of its operating segments, the price to earnings model was used to forecast the target share price. SLF’s P/E averaged around 10. This is slightly lower than peers, given its size and proven track record. With interest rates set to rise and managements confident in achieving strong growth I see the 2023 multiple increasing to 11.

According to company forecasts, I expect revenue growth of 5% and cost mitigation to be the key driver for increasing earnings by 8%+. Given the higher payouts for COVID deaths, payout costs will eventually fall to historical levels. In 2020, payouts accounted for 90% of revenue. However, they declined sharply in 2021 due to SLF’s better adjustment of their premiums and insurance offerings in order to match the updated death forecasting. As COVID uncertainty persists, especially in low-income regions, I expect payouts to rise slightly this year to 60% of revenue before subsidizing the following year. With Asian digital claims growing 7% year-over year and improved outcomes for digital clients, SG&A expenses will fall by 2% compared to revenue over the next five.

SLF has delivered consistently high earnings growth and continues its efforts to extract value worldwide, as demonstrated recently by the IPO of their India asset managing joint venture. This generated a $362 Million gain. SLF’s leadership position in individual and group retirement services insurance is a strong indicator that their multiple will continue to grow with their peers as they penetrate the high-growth APAC region. SLF’s current share price of $66 ($51 US) has a strong dividend yield at 4%. This yield is safe, with a current and target payout ratios of 40%.

Based on 2023 estimates of earnings per share at $7.10, an 11x multiple gives a projection of a share price of $77 (or 60 USD). This stock could return 20% over the next 18 months if it is combined with its current yield.

Conclusion

SLF is a strong buy today because of the tailwinds from global rate hikes and revenue acceleration within APAC, which is a high-growth region. SLF will continue to be the leader among its peers as interest rates rise. I believe SLF will be able achieve a higher price-to-earnings ratio. SLF should be successful in the second half 2022 and beyond, due to its global leadership and well-capitalized structures. Investors will be pleased with the company’s continued improvement in cost management through improving their digital client offerings. The consistent dividend also provides a steady income stream. I believe that management will achieve the majority of their internal goals and the stock price will follow in 18 months to $77 per share ($60 USD).