Sun Life Financial Inc. (SLF) Earnings Call Transcript & Summary

Yes. In Canadian, that would be USD 600 million to USD 650 million.

Pretty substantial. And then the dynamic of 70-ish percent of your costs are variable. I guess that interplay between moving the needle and continue to grow your asset base should give you the benefits of scale over time. How do you sort of see that developing, like can the margin go meaningfully higher over, say, a 2- to 3-year period, if you really...

A couple of things. One, clearly, you guys are all in that business. Asset managers that are in the public equity, in the public fixed income space, public equity, in particular, when equity markets are up, they -- we tend to do better because the AUM is higher and the fees are higher. And so you've seen that great tailwind for probably since the end of the global financial crisis where equity markets have been in a long, long bull run. We think that -- it's set back, right? We didn't want to be an insurance company [ that run ] MFS. We want to be an asset management and insurance company. We think MFS is a key part of that in the public equity and the public fixed income space. I think they're doing good things. Active ETFs in the U.S., there's tax advantages for the client until they've been building out their active ETFs, and we think that's a really good thing and they're starting to get recognized on that side. They've been building out their public fixed income. They've had great performance in public fixed income. The issue of public fixed income is the difference between grade and not so great is relatively small. So we're expecting over time that we'll start to get more flows there. They've been -- they're very close to the clients and their clients understand how they manage money, but they're subject to all those trends that happened in public equities and public fixed income where you've seen changes going more passive, institutional investors having different priorities, some going into the alt space. But they continue to perform well for their clients against their objectives and how they define their asset management approach and their clients understand that and buy into that. That's how they've stayed strong in the U.S. retail space and in the global institutional space. And so while they've been in outflows, those outflows are roughly consistent with what you would see in the broader industry. And in fact, over time, they've been better. And we think that having a strong public equity, public fixed income asset management business that's global is important to us. We can find ways to position MFS through our wealth businesses. We're doing that in Asia and in Canada and help MFS grow. But they are that piece of our asset management platform. Alongside of that, we saw many years ago, and Steve will talk about this more probably that there was a switch coming into the alt space and that clients were becoming very interested in the alt space. And we systematically built over time one of the strongest alternative businesses in Canada, and our goal is to compete with the strongest alternative businesses in the world. And so we've built a platform that has $250 billion of third-party assets in the asset management, growing across real estate, infrastructure, private credit and we took our private fixed income space business out. And that gives us a balance across public equity, public fixed income into the alternatives. And we think that that's really good to manage through different cycles, different interest rate environments, different equity market environments, different economic environments, and it's important for us as an asset manager to see across those. And everybody understands what their role is, and how they add value to the firm. We won't -- we'll see different cycles in each of those and being across the asset management platform is important to us. We are increasingly looking to ways to add value as a major player in the retirement space in Canada. Our GRS business is looking for ways to bring more of alts to our client base. Our wealth business are looking at ways to bring more alts to our client base, but also to bring more of MFS. So we have about $25 billion of MFS globally that we run through our wealth businesses, and we think we can increase that quite significantly. We think we can increase in the alt space what we do through our wealth businesses. And creating that we're called a bit of a flywheel from our wealth businesses and our asset management businesses. We're unique. We have $1.5 trillion in assets under management and only $200 billion of that is our general account, $1.3 trillion of our assets are with third parties or through our wealth business. And so we get this incredible opportunity to think about ourselves as an asset manager with the capabilities we have on the insurance side to provide some flows into the asset management space. And when we step back and look at other alts businesses, they're buying insurance. We don't need to buy insurance. We have insurance that we like. Again, it's low capital, low guarantees. We're not worried about the insurance, things that could happen from buying those books. And that insurance business helps to fund how we think about the alts business.

Okay. You sort of dovetailed into my next question on SLC. But just going back to MFS. So it sounds like it's more of a margin stability story that...

Sorry, yes. When you look at the margins -- as you said, 2/3, 70% of their costs are variable. And so you get some of that. They actually have -- their fixed cost for the size of AUM they have is actually relatively low by industry standards. It has to do with how they manage and how they manage globally. I think that you're seeing some natural sort of changes in the margin as things change, but a lot of it is going to relate to the size of the AUM. And if you think about MFS, we get a $1 billion plus earnings from MFS, 90% of that comes to us in cash. So people are assessing MFS, they should also look at what we earn on that 90% that comes back to us in cash. If you want to do an easy way, just you could assume that, that was buybacks, right, because we're -- but it also provides potential for M&A and those types of things. So that cash flow to us -- I've said this before, that cash flow to us from MFS has funded the growth that we've had over the last 10 years in M&A but also in buybacks. Like it's a very important source of cash for the company.

Okay. Can you maybe talk a bit more about that flywheel, like that connectivity, SLC, obviously, MFS. It seems like it should have a very good story on that interlink clients.

I think there's huge potential here, right? And if you look at us as a global business, we have connections on the wealth side in Asia and in Canada in particular. And I think the opportunity in Asia long term is really significant. We need to find -- we've run a little bit too siloed, and we need to find some ways to look at bringing some value back into these businesses, particularly today, where we know a lot of investors want to increase their ownership of alt, right? And we've got these great alts capabilities. We've seen this with you guys. We have a partnership with you where we're bringing alts to your client base, and that's working phenomenally well. We can do more with our own wealth businesses to bring some of those capabilities back to our clients. So the interest in the alts from investors is, as you would know, is significant today. And I think we have some opportunities to really help with that. We can help with that in other ways, right, helping to introduce Steve's business. We deal with 25 banks in Asia, helping introduce Steve's business to those 25 banks and finding ways that we can bring some capabilities to those. So I think thinking more about growth and using our capabilities, whether they be in the wealth businesses or whether they be in partnerships we have to drive more flows will be an important part of creating this flywheel.

And is the space getting a bit more competitive? I imagine it seems like everyone seems to want to go into that alternative space. It's...

I think it almost couldn't be more competitive. It's very competitive because you've got some really massive players globally. I mean, Blackstone, Apollo, KKR.

But it's not impacting your ability to...

We think we -- well, one, we think there's room for us because we were very good at it. I think it would be hard today to rebuild this. There's not many insurance. If we look globally at insurance companies, and you mentioned this earlier, we have, we think, arguably the best asset management platform of any insurance company around the world. And we want to make sure we're taking our insurance and wealth capabilities to that asset management to help drive it. So as an insurance company, we think there's a lot of opportunity that way. If you look at it like an asset management company, you said you're 50% asset management and you're also an insurance company, I would say we have the best insurance business of all the asset managers around the world. So our job now is to leverage the 2, is to create value between those 2. And we are doing a lot of that, but I think we can do even more.

Okay. That's helpful. We have a few more minutes. Definitely 2 areas I'd love to touch base on definitely Asia, obviously, you're excited about Asia, the high net worth story, the megatrends in Asia, insurance demand, all that good stuff, maybe just high level, like what excites you about Asia other than the obvious?

Yes. I think there's tons of growth. I mean, Asia, there's 4 billion people. There's -- we're primarily in developing economies. We see long-term growth across Asia. Manjit is doing a great job. He's reenergized that business there, and we're starting to see good growth come out of a number of our businesses. If you saw our Investor Day, Manjit, talked about at-scale businesses and to achieve scale businesses. He's got this great balance of driving value and growth through our at-scale businesses and investing and growing our not at-scale businesses. He's -- many of you probably know Manjit, he's a disciplined guy, we're very aligned in terms of what that growth pattern is. And we've now built out distribution strength across all of our markets. So in every market we're in agency, in every market we're in bancassurance. In markets where brokerage is significant, we have brokerage business. And we have something digital in all of the markets. So we have the right distribution platform. You're seeing us grow fast in Hong Kong, in high net worth in India. And I think there's opportunities to see -- Philippines has done quite well, start to see the not yet at-scale markets start to deliver towards adding value there. So China, Indonesia, Vietnam. So we've got the right -- we're in the right countries. I think there's significant opportunity. We talked about 15% growth, and we're committed to seeing that growth of 15%, which is part of that ROE story where you're going to see that growth. So in Asia, as you know, I spent 5 years there, we went from $100 million in income when I was there to -- with Manjit now today, if you're looking, we've been running around $200 a quarter. So figure that as $800 million, so from $100 million a year to $800 million a year between 2012 and now. We're hitting that 15% and we think we can continue to do that. I know one of my competitors is up, who might be here now talking about Asia later. We're as passionate as Phil is about Asia. And they do a great job there. We think we do a great job there as well. And I think there's. If you look at the top 5 companies in Asia, we're with them one of the top 5. And I think we see tons of opportunity to continue to grow and be stronger in Asia, and it's a good market. And there's also a developing high net worth business there. So it's -- we're very committed to that 15% growth and that will grow the ROE alongside of it.

Okay. Great. And then on capital, I definitely want to cover capital. You're sitting on a very, very strong LICAT ratio, a lot of cash at the holdco level. So it obviously lends the question to M&A. What do you -- are you seeing that the market is conducive to M&A right now? And then maybe compare that to the buyback option. I think you announced an NCIB, which obviously, you could do more if you wanted to. Maybe just talk about your priorities between...

Yes. Yes. I don't want to take away too much time, so I'll try to go fast. We do M&A where we see a need for scale or capabilities where we see we can hit our financial objectives and where we believe we can execute. And that's when we do M&A. We're at a place right now that you'll hear Steve talk about it, but he's going through the buyout of BGO and Crescent, our 2 biggest alts asset managers. We may do some bolt-ons there, but we think we have the right set of capabilities, and he is quite involved in that transition for BGO and Crescent. So I don't -- I'm not seeing M&A there. Asia, Manjit, is going through a bunch of bancassurance deals, and we think we can grow without significant deployment of M&A there. Canada, there's not much happening. And in the U.S., Dan is -- Dan and David are heavily in the dental sort of fixed. So I don't -- we're in a great capital position. I'm not saying we wouldn't do any M&A, but if we did M&A, I see smaller sort of bolt-on things because we need to know that we can execute on the integration. That's going to be the most important thing. And so having conviction on that is going to be important before we do something. So that means that our buyback becomes more important because we do have a lot of capital and sitting at the top of the house with too much capital is not what we want to do either. And at 151 and a 20.4% leverage ratio. So I would say that -- I'm not saying we would never do an M&A, but it has to meet those 3 criteria and it's -- at this point in time, the business group would have to prove to me that they could execute on the integration. I think it's a tall order to prove that when there's so much going on. So this gives us the flexibility. We do think, in these times, having a strong capital position not a bad thing. But at 151, I think, were on the high side.

Okay. Fair enough. And then any final key messages to investors?

It's -- we're feeling good about our medium-term objectives, and we're feeling good about achieving our medium-term objectives. And there's a lot of resiliency in our business. We've got a great executive team, and we're committed to delivering on those objectives. And so I think we're in a good position to do that. It's a more difficult environment. We all know that today is more challenging than it was in 2012 for sure, when I first went to Asia. If I think about that environment, we had a great run for a number of years in terms of the economy and now things are more challenging. But we think we're built to grow through that. And I think the diversity of our business across geographies, 28 countries and the diversity of our business where we've got this asset management and wealth platform getting close to equal size to our protection business gives us a lot of resiliency in our ability to be low capital is really important to that. So thanks, Mike. Thanks for...

Thank you very you much for joining us today. Thanks for the insights as always.

Always a great conference, right? It kicks the year off in a good way. So thanks. Back to school for all of us.

Pleasure to have you. Thank you, Kevin.

Thanks, Mike.