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

Okay. Maybe switching gears to, I guess, SLAM some life asset management. Just curious if you could maybe talk a bit about just the cohesiveness that you get with BGO and Crescent post buy-ins, you've got the management equity plan and how that -- that platform now will work differently than it might have been in the past as a sort of siloed dynamic. -- yes. Because I think that's where investors maybe want to just hear more about like what Yes, yes.

It's a great question, Mike. We've been on a over 10-year journey now to build out I don't turn asset management business that will sit beside MFS, which is its public fixed income. And so -- we've been building out -- we bought now 3 real estate companies, Bentall Kennedy, GreenOak and Bell. Well, we bought a private credit company that's working with our private fixed income capabilities. So we bought Crescent. We bought infrastructure company infrared. We bought 2 LDI companies in Prime and Ryan Labs. And we bought AAM, which is helping us bring the alternatives capabilities to U.S. wirehouses. So we've built a lot of capabilities there. For the first time, starting this year, we're starting to bring those all together under the leadership of Sunny Kelsey. Sunny was one of the founders of GreenOak. Sunny is -- can see the value we're creating, can see the sort of organization and how they all come together. That's what's attracted them to be the CEO. In fact, he rolled a big chunk of his ownership in BGO into the new organization. And we're working with Sunny to do 2 things. One, there's about 1,500 clients that those organizations service. but there's not a lot of overlap in the clients. So we're bringing one sort of distribution platform together where Crescent may be meeting with an institutional investor in some part of the world and that institutional investor needs some real estate you can bring up GreenOak. So there's some top line synergies you can imagine happening. There's also synergies on the expense side. Each of those organizations had their own platform. And we're going to need one platform because we're bringing it into one organization. So Sunny is focused on growth on the top line side and also reducing expenses on the bottom line side. I think those are both going to be very good for us, and that's his primary focus over the next 12 months is unlocking those. At the same time, we created Sun Life Asset Management under Tom Murphy. And Tom Murphy is looking for ways to create a flywheel between our insurance business and the asset management business in support of SLC, but also in support of MFS. And so that's where things like our Wilton Re transaction came from. So we started that process with Wilton Re probably a year ago and figuring out a way that we could be the asset manager alongside of their sidecar business they were creating. That's an example where we brought insurance expertise, we bought relationships, and know-how to the table to help SLC build a bigger business. We expect that's going to give about $10 billion in assets and a good chunk of those assets will be in the alternative space. So SLC will manage that whole $10 billion and a good chunk of them will be in the longer duration space. We're also looking for ways to leverage our wealth business, where we can drive flows into there. We've built a relationship with Scotia. So with Jackie's team, we've created a distribution relationship for SLC based on our relationship. That's sort of part of the idea of this flywheel. So in addition to sunny looking for top line and expense synergies Tom is out there looking for solutions that can help drive more assets to SLC. So ultimately, it's really about creating that bigger alternatives business, there's about USD 200 billion in AUM today. We've got a commitment to grow that business earnings at 20%. We want to see increasingly flows coming in there and then improving the margin a little bit on the expense side. And then this year is still a transitional year -- this year is a transitional year -- they literally just came together. And partly, you asked -- you asked another question, which was the management equity plan. We probably identified about 1.5 years or 2 years ago that if we were going to be successful in the alternative space, we had to find a way to have more of the ownership in the hands of the asset management team there, the investments team there. And we looked at what other alternative asset management companies were doing, and they were roughly 20% to 25% the firm was owned by management. And we went through a process through staking grants through the management equity plan and through leveraging through helping founders roll over to get to 22% ownership. And we think that alignment -- it's going to be really good. That's more than we thought we would do when we first did the transactions, but we think that's going to be really important for the long term growth. So there's a lot of alignment for Sunny and his team to find those revenue synergies and to find those expense synergies and to continue growing that business. So that management equity plan I think was fundamental to us structuring the asset management business to be successful.

Thanks for that very thoughtful response. I wanted to ask about MFS. Yes, obviously, there's been some industry headwinds around active versus passive, some clients bringing money in-house, which has impacted your flows. And then you've got a big part of your cost base being variable which doesn't maybe allow the same amount of cost cutting that otherwise might be there as an opportunity to sort of move the needle. But just in terms of MFS, like how do you sort of think about that franchise longer term? And how do you create value just given some of those dynamics that seem to be pretty consistent for a while now.

If I went back to 2014, Sun Life was an insurance company that owned MFS. We were not an asset management and an insurance company. We've been on a journey the past 12 years, the years to become an asset management and an insurance company. And that growth was about investing in the alternatives business that we just talked about. But it's also both thinking about MFS differently. MFS is part of our asset management business, it's part of SLAM. It's is public equities and public fixed income. If I had the -- a magic wand. Our business today is about 35% asset management, and it's 65% insurance. The perfect mix for Sun Life, which is what we're driving towards the goal and we've set this for the Board would be 50% asset management and 50% insurance. And that 50% asset management, I would like to see it be about 50% public equities and public fixed income and 50% alternatives. That -- we're on a path to that with the 20% growth in the alternatives. It's not to downplay MFS' role, but it's to say that we need a balance across all of our asset management businesses to drive that. So that is the mix we're driving towards. That's why we're putting this emphasis on the alternatives. Sometimes people say, we're not doing enough with MFS. Well, the first thing we did, we're building out a full asset management complex. So we've been -- we've fundamentally invested it and built A very good alternatives business. That's why we won the Wilton contract because they saw our investment capabilities. In the case of MFS, I've spent a lot of time with Tad and the team there. They're -- they've been building out their public income. They've got great performance in public fixed income. We've been helping them with seed capital, so they're focused on that. They've been building out their active ETF business. They've been building out their SMA business. There's no doubt that the public equity active asset management, you guys are all in that business. It's a tough business right now. But we still think it's important. We think it's important through different cycles, we think it's still an important part of the market. We think it's still important to how organizations and economies work. I was jokingly saying earlier that we wouldn't come here and speak to active asset managers for a day if we didn't think what you did was important. So we think it's important. We do recognize that it's been a challenging cycle, and that cycle is kind of worked its way through the institutional business now into the retail business. We know what's driving it. But we also know that MFS knows how to manage money. They know how to work through cycles. We know that this is a difficult cycle. We think they're doing the right things with public fixed income. They're doing the right things on their equity side. They're not going to disappoint their clients. Their clients know what they're doing and why they're doing it. They've told the clients the story. The worst thing they could do now is change their investment style. And the clients would have gone through 5 years of performance, which we keep calling a bad performance, bad relative performance. Their performance probably last year was 20% increase versus 25%. So it's still pretty good, right? But what you don't want to do is see them change their performance just as a cycle changes. So we're very confident in the MFS management team. We're very confident in what they're doing to extend their business into other areas. We recognize that it's a challenging time, but it's -- overall, I think that support that they get from us is actually important. And we're trying to support them in other ways. I talked about Tom and the flywheel. We're trying to make sure that inside of our wealth businesses that MFS is getting the right allocation. And we're working with them closely. They get about $25 billion of their AUM is from our wealth businesses in Canada, our wealth business is condo $28 billion. So maybe 25% is not enough, like maybe there's more opportunity there, and we're working with them on things like the blended funds and blended research funds and those types of things. So we're finding ways that we can -- can help drive flows, we're finding ways to seed investment. We're finding ways for them to build out their strategies, SMAs and active ETFs and fixed income. And we're also trying to recognize that it's a cycle and some patience is important. I hope all of your owners also have that patient and what you guys do because it's hard. It's not easy.

So I wanted to ask about the Asia business. I know Manje has long-term ambitions, wants to grow it in different aspects of the existing footprint. You've obviously had a lot of success Hong Kong, India, you name it. Maybe talk about that business as a growth engine for Sun. Obviously, your focus on that 50-50 split, but Asia seems to be a pretty good opportunity, but maybe even potentially on the -- you can sort of dovetail into the M&A angle with Asia because I think.

The 50-50, Mike, is a good point. I mean the 50% that's insurance, Canada is obviously foundational for us. And Canada helps us with the wealth business. I just talked about that, both on the -- in SoC and it's foundational for us providing talent and thoughts and all that kind of stuff. Asia is the fastest-growing part of that insurance 50%. And it will become an increasing piece of that. It's about 20% of the whole company. So the 65% that's insurance, it's 30% or a little bit over 30%. That's going to keep growing as a percentage of that insurance side. I think it's really important for us. It's -- we have scale now. We're good at it. We're in the right 8, 9 markets. We have Four businesses now that are upscale and are performing really well, Hong Kong, high net worth, Philippines and India. And we're building good durable businesses in Indonesia, Malaysia in China and in Vietnam. And the varying degrees of challenge and there's never a challenge. But it's been a big part of our growth engine. I took over Asia in 2012. It was making $100 million a year in income, and now we're making $200 million a quarter or more probably $200 million quarter. So it is something -- and the ROE is improving an doing a great job of setting the right tone on there, and it's -- our responsibility to keep supporting him to make it get bigger. He actually doesn't need M&A to do it, right? We have -- we have agency bancassurance, brokerage and pretty much every market. We have digital distribution in a lot of the markets. We feel like we're partnered with the right banks. We feel like we're in the right market. Yes, it's really about focusing on execution and getting that done. I'm not saying we added a lot of capabilities with bancassurance over the years, but it's really about building that momentum and growing alongside of those markets as they grow. And Hong Kong, India and high net worth in particular, have done phenomenally well over the last couple of years. And I think that there's momentum that's going to come over time in the ASEAN markets.

Okay. And then maybe going over to the Canadian business, what do you refer to it as foundational or sort of all the asset I mean -- I mean, despite that dynamic, like the growth has been has been pretty good. Very good impressive. I'm wondering in what's normally seen as a mature market with a few dominant players, including Sun Life obviously. What are the opportunities -- the greatest opportunities to grow the Canadian business from here? Is it like a cost story? I know you're investing a lot in the digital side and making it more efficient. Is it that or is it -- I guess, if I ask it insurance executive Canadian are always underinsured to some extent...

Yes. I think it's about -- it's a lot of things. But I think Jessica has brought a real new energy to that team. And she comes in, she's an engineer software engineer from MIT, who worked for Ping on as they were developing a lot of their digital stuff. She is bringing a real digital mindset to that business. So she sees these opportunities, in particular, in the benefit space and in the GRS space to bring digital capabilities to lock into that. I think we've undervalued our $280 billion in AUM in GRS, and we think there's opportunities to leverage that and leverage our wealth background and wealth experience and relationship we have with investment teams and investment managers. So -- and then that dedication to health. So I see opportunities in the wealth side. I see opportunities on the health side. And in terms of individual and our advisers individually, so I'm actually going to in a couple of weeks. They are bringing integrated life insurance, health insurance, wealth and estate planning to clients, and that is very much needed. So I actually feel like if we can get this holistic planning concept right for our adviser base, grow our wealth business and grow our benefits business, we're well structured to hit the 6% growth that we're expecting out of Canada. And Jessica has been way outside of that. And I think our commitment to digital should also help that to grow both top and bottom line. So I think Canada is a pretty interesting place and it's got a good strong dynamic leadership team.

That's super helpful color. And then on capital, you probably get annoyed being asked this question often, but just on buybacks and the whole dynamic, maybe you can touch on the whole dynamic of capital preferences. Obviously, organic is number one. M&A maybe tuck-ins here and there. It doesn't sound like you're looking for anything transformational. But on the buybacks specifically, I'd love to get your thoughts on maybe a more aggressive buyback potentially? Or is that something that's just not in the cards for now? Because it seems like your LICAT being as high as it is, you could easily absorb that.

So we're looking at -- you're absolutely right. We start with organic growth to the business and the dividend. And then we look at M&A where we think we can add capabilities but meet our financial returns and execute, and that's an important piece. And then the buybacks. The buybacks, we've been, in essence, buying back shares at the rate that we've been creating capital, right? So we see that as being a very sustainable buyback program where we can consistently -- it helps our EPS. It helps our ROE, where we can consistently deliver that capital back to our investors. And that's important to us. And that part we are committed to. We will do and we have done M&A. But if I look at it today, MFS really isn't interested in doing M&A. And if you think about my 50-50, we don't have to add to public equity, public fixed income. The alternatives business in the next 12 months is going through its integration. I think that's really important to get that part right, and we support them with like the Wolt Re deal and the wealth into there. Canada, there's not much to be done. The U.S. isn't -- I told this today when I said in the call, they're not getting capital until they get through the fixing of the DentaQuest business. And then if you look at Asia, I said it earlier, I think we're in the right markets. We've got the right distribution. It's really about organic growth. So there may be some smaller things. We've got this -- we're buying up in Malaysia from 49% to 70% to a few hundred million. It's disclosed in the notes. That we're waiting for regulatory approval. But I don't see M&A being a significant piece of what we're doing over the next little while. I think our buybacks will then form part of generating the capital back. We are looking for ways of growing organically and organic income. And there's things we can use that capital for organically as well. So I'll give you an example. We have -- and it's with Scotia, we have a line of credit that we've given to the SLC management team of about $1 billion when they need to create seed capital. We're looking at bringing capital up from our subsidiaries back into the holdco and rather than paying it out, we're looking at ways that we may invest that more into seed capital at SLC if we can get 2 things: one, good sustainable returns. But two, if I give $100 million of seed, I want them to be able to generate $1 billion of other assets in. And so we're going to look at ways that we can do some of that as well. So there's ways that we can use our capital strength to do buybacks, drive earnings, drive organic earnings, drive strength in those businesses we want to grow and position ourselves well. So I think the large M&A is hard, and I think you have to be ready for it. And I think at this point in time, we have a lot of other things to do that will drive the MTOs that we started talking about earlier.

Okay. Awesome. And just in the interest of time, I guess we'll stop it here. But Kevin, thank you so much for the insights and always super, super nice to have you on the call.

Great to be the first insurance guy.

Thank you very much, Kevin.