Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) today announced its results for the fourth quarter ended December 31, 2018. Fourth quarter reported net income was $580 million and underlying net income was $718 million.
“Our fourth quarter capped off a year of strong performance for Sun Life, generating annual underlying net income of $2.9 billion. In 2018, we achieved double-digit growth in earnings and value of new business, we increased underlying return on equity to 14.2%, and delivered dividend growth of 9%,” said Dean Connor, President & CEO, Sun Life Financial. “Around the Sun Life world we are putting Clients at the centre of everything we do. We are making it easier for Clients to get what they need, when they need it, on their mobile devices, the web, from our call centres and from their financial advisors. We launched Lumino Health in SLF Canada, our premier digital health network that offers ratings of health providers, price comparisons and health tips, which is already generating impressive usage statistics. As part of our focus on innovation, in Asia we completed our investment in the first virtual insurer approved under the Fast Track process in Hong Kong, Bowtie Life Insurance Co. Ltd.
“During the quarter, we also announced our plan to merge Bentall Kennedy, our North American real estate and property management firm, with GreenOak Real Estate, and we will acquire a majority stake in the combined entity. This transaction is right on strategy, broadening our asset management pillar by expanding the capabilities of our alternatives manager, Sun Life Investment Management. Combining the strengths of two leading and globally respected real estate investment managers will bring Clients a broader range of real estate investment solutions across North America, Europe and Asia.”
Financial and Operational Highlights
Our reported net income of $580 million in the fourth quarter of 2018 increased over the fourth quarter 2017 result of $207 million primarily due to the $251 million charge in 2017 related to the enactment of the U.S tax reform. The increase also reflected positive impacts from other adjustments and assumption changes and management actions (ACMA), partially offset by market related impacts. Underlying net income in the fourth quarter of 2018 increased $77 million to $718 million compared to 2017, driven by the effect of the lower income tax rate in the U.S., favorable expense experience that resulted from ongoing expense management and lower incentive compensation costs, and other experience, partially offset by mortality and morbidity experience. Market volatility reduced our fee income from our asset management and wealth businesses primarily due to lower asset values, offsetting business growth in our life and health insurance businesses. Our reported net income and underlying net income increased by $18 million and $16 million, respectively, as a result of the impact of the movement of the Canadian dollar in the fourth quarter of 2018 relative to the average exchange rates in the fourth quarter of 2017.
Insurance sales and wealth sales were up 19% and 3% over the prior year quarter, respectively. In the fourth quarter of 2018, our reported and underlying ROE increased to 10.9% and 13.6%, respectively, reflecting higher earnings. SLF Inc. and its wholly owned holding companies ended the quarter with $2.5 billion in cash and other liquid assets.
Our strategy is focused on four key pillars of growth, where we aim to be a leader in the markets in which we operate. We detail our continued progress in the four pillars below.
A Leader in Insurance and Wealth Solutions in our Canadian Home Market
SLF Canada’s reported net income of $96 million in the fourth quarter of 2018, down 44% compared to the same period in 2017, reflected equity market impacts partially offset by favorable credit spread impacts, and favorable ACMA. Underlying net income of $245 million in the fourth quarter of 2018 increased 6% from the same period in 2017, reflecting favorable expense experience that resulted from ongoing expense management and lower incentive compensation costs, and other experience, partially offset by less favorable investment experience.
Insurance sales were down 4% in the fourth quarter of 2018 due to lower individual insurance sales compared to the same quarter in 2017, partially offset by slightly higher Group Benefits sales. Wealth sales were up 53% compared to the same quarter in 2017 mainly due to large case Defined Benefit Solutions (DBS) sales in Group Retirement Services (GRS) in 2018, while individual wealth sales were consistent with the prior year.
In the quarter, we continued to advance our digital capabilities. We launched Lumino Health, Canada’s premier network of health resources free to all Canadians that enables Canadians to find highly rated health providers, compare costs and receive health tips, helping them to make informed health care decisions. By December, we were reaching annualized health-related search volumes of 3.5 million across all our digital platforms, with visitors to Lumino Health spending double the industry standard time engaged with the platform. Digital tools and robotics are making it easier to do business with us. For example, in addition to straight through electronic underwriting, which occurs for 25% of our individually underwritten applications compared to the industry average of 9%, we are utilizing artificial intelligence to assist our underwriters in decision making for Client applications from our Career Sales Force channel.
A Leader in U.S. Group Benefits
SLF U.S.’s reported net income of $118 million in the fourth quarter of 2018 increased $181 million compared to the $63 million net loss in the fourth quarter of 2017, reflecting the $114 million charge in 2017 related to the enactment of the U.S tax reform and favourable interest rate impacts. Underlying net income of $121 million in the fourth quarter of 2018 was up 27% from the same period in the prior year, reflecting the impact of lower income tax rates in the U.S., business growth, favourable lapse and policyholder behaviour experience and other experience, partially offset by unfavourable morbidity and mortality experience. The after-tax profit margin for Group Benefits(4) was 6.7% as of the fourth quarter of 2018, compared to 5.0% as of the fourth quarter of 2017.
SLF U.S. Group Benefit’s sales were US$639 million in the fourth quarter of 2018, up 29% compared to the fourth quarter of 2017, driven by growth in both employee benefits and medical stop-loss. Full year 2018 sales were US$1.0 billion, a record high for Group Benefits, and up 16% compared to 2017.
We created the FullscopeRMS brand to offer our comprehensive suite of capabilities to be sold and serviced by employee health plans and other insurance providers, including a turn-key stop-loss offering. FullscopeRMS, which grew from our successful Disability RMS business, now offers solutions for disability, life, stop-loss and voluntary coverages including product development, actuarial support, underwriting, claim administration, risk management and distribution training.
A Leader in Global Asset Management
SLF Asset Management’s reported net income of $244 million was up 114% from the fourth quarter of 2017, which reflected the $78 million charge in 2017 related to the enactment of the U.S tax reform. The increase also reflects the impact of negative fair value adjustments on MFS Investment Management’s (MFS) share-based payment awards.
Underlying net income of $227 million in the fourth quarter of 2018 was in line with the fourth quarter of 2017 as a result of the lower income tax rate in the U.S. offset by lower average net assets (ANA). The pre-tax net operating profit margin ratio for MFS for the fourth quarter of 2018 was 38%, down from 40% for the fourth quarter of 2017. In the fourth quarter of 2018 SLF Asset Management’s gross sales were consistent with the fourth quarter of 2017 on a constant currency basis.
SLF Asset Management ended the fourth quarter with $650 billion in assets under management (AUM), consisting of $584 billion (US$428 billion) in MFS and $66 billion in Sun Life Investment Management (SLIM). SLIM continued its momentum with its twelfth consecutive quarter of net inflows, while MFS experienced net outflows of $8.7 billion (US$6.6 billion) in the quarter.
MFS’s long-term retail fund performance remained strong with 78%, 79% and 94% of MFS’s U.S. retail mutual fund assets ranked in the top half of their Lipper categories based on three-, five-, and ten-year performance, respectively, as at December 31, 2018.
We announced our plan to merge Bentall Kennedy with GreenOak Real Estate (GreenOak), a global real estate investment firm with approximately $15 billion (US$11 billion) in assets under management as at December 31, 2018 and nine offices globally. Sun Life Financial will acquire a majority stake in the combined Bentall Kennedy and GreenOak entity that will be named Bentall GreenOak and be part of SLIM. This will extend our capabilities in real estate investment solutions in a complementary way and on a pro forma basis will increase SLIM’s total AUM to approximately $80 billion. This will bring Clients a broader range of investment solutions that include core, core plus and value add real estate, plus senior and tactical real estate debt strategies across North America, Europe and Asia. The pending transaction is expected to be accretive to underlying earnings per share and return on equity in 2019.
A Leader in Asia through Distribution Excellence in Higher Growth Markets
SLF Asia’s reported net income of $125 million in the fourth quarter of 2018 was consistent with the fourth quarter of 2017, reflecting unfavourable market related impacts, partially offset by positive ACMA. Underlying net income was $140 million, up 26% from the fourth quarter of 2017, reflecting favourable investment experience, partially offset by higher new business strain.
SLF Asia insurance sales of $251 million in the fourth quarter of 2018 were in line with the fourth quarter of 2017, as strong sales growth in the Philippines, India and Hong Kong was offset by lower sales in International due to the competitive environment and market shifts. SLF Asia wealth sales were $1.9 billion in the fourth quarter of 2018 compared to $3.6 billion in the fourth quarter of 2017. Lower mutual fund sales in India arising from market volatility and the Philippines due to elevated money market sales in 2017 were partially offset by continued strong growth in our pension business in Hong Kong.
We completed a strategic investment in Bowtie Life Insurance Co. Ltd (Bowtie), the first virtual insurer in Hong Kong approved under the Fast Track process. The investment in Bowtie is a reflection of our continued investment in technology and innovative ways to provide life and health insurance solutions.