Sun Life Financial

Sun Life Financial reported solid second-quarter numbers. Underlying earnings per share came in at CAD 2.02 per share, up 12.8% compared with the year-ago period and above the firm’s medium-term target of 10%.

Why it matters: Asia remained a bright spot, with 18% earnings growth, while the Canada segment also delivered surprisingly strong results, with 23% growth, compared with peers' high-single-digit earnings declines in their domestic businesses. Sun Life's peers, Great-West and Manulife, both faced negative experience in Canada's group benefits business, while Sun Life had overall favorable insurance experience in Canada, though product mix could be at play. Sun Life did not break out group benefits detail in earnings materials. We advise investors to wait for more detail from Sun Life's Aug. 7 earnings call. That said, group benefits policies are typically repriced annually, and we do not expect claims experience to differ materially over the medium to long term for the same product.

The bottom line: As we incorporate the latest results, we don’t expect to make a material change to our CAD 89/$63 fair value estimates for no-moat-rated Sun Life. We assess the shares as overvalued. Asia delivered its seventh consecutive quarter of double-digit earnings growth. The Hong Kong business, which constitutes more than 40% of Asia's earnings, grew 29% in the second quarter. While we are impressed by Sun Life's strong earnings growth in Asia and Canada in the second quarter, our longer-term expectations are more modest at high single digits and midsingle digits.

Coming up: Along with earnings, Sun Life announced that Scott Powers will retire as chair of the board of directors, and Joseph Natale will succeed Powers following the firm's annual meeting on May 5, 2027. Natale has been a member of Sun Life's board since February 2023.

After Natale takes over the chair, we expect no change to Sun Life's current strategy, which includes investing in digital capabilities, expanding its investment management business, increasing its health benefits market share and service offerings, and accelerating its Asian growth.

We are increasing our fair value estimate to USD 66 per share from USD 63 after updating our near-term forecasts and incorporating foreign-exchange rate updates. Our fair value estimate implies 2.3 times book value as of December 2025. We use a 10% cost of equity and an exchange rate of USD 0.72/CAD 1.

We project Sun Life’s insurance revenue to grow at a 4.7% compound annual growth rate over the next five years, driven by faster growth in its Asian markets and slower growth in its Canadian market. We expect its bancassurance partnerships and its Asian agent force to drive Asia insurance revenue CAGR of high single digits to low teens in the next five years. For the US market, we forecast US insurance revenue to grow at a CAGR of 4.9% over the next five years. We expect its Canadian insurance revenue to grow at around a CAGR of 3.8% over the next five years. We project the firm’s total insurance service expense will be around 84.5%-85.0% of its total insurance revenue over the next five years.

For Sun Life’s asset management business, we project its total AUMA to grow at a 4.3% CAGR over the next five years and fee income to grow at low-single-digit CAGR during the same period. We forecast the fee compression pressure on MFS' traditional managed funds to more than offset the benefit of SLC’s alternative-asset inflows that come in at higher fee rates. We view the management team’s medium-term target of growing SLC’s earnings by a 20%-plus CAGR and MFS' earnings by over a 5% CAGR over the next five years as very lofty.

We forecast an investment yield of 3.84% on the company’s portfolio in the terminal year of our forecast. We project that Sun Life will have a total equity/asset ratio (without separate account assets) of 10.9% in our terminal forecast, and the return to equity will be around 17.9% in the terminal year of our projection, reflecting our midcycle forecasts for the company.

Due to its heavy exposure to the highly competitive life insurance industry, which is distinguished by relatively undifferentiated and easily replicable products, we do not believe that Sun Life has carved out an economic moat. While its MFS asset management business has a well-known brand, its heavy focus on the active US equity space and US retail distribution make it more susceptible to fee compression and outflows. Sun Life’s focus on growing its alternative-asset management business, SLC, is the right move, but represents only a mid-single-digit percentage of consolidated earnings.

While our projected midcycle ROE of around 17.9% for Sun Life is higher than our 10% cost of equity, we do not believe that there is sufficient qualitative substantiation to justify an economic moat for the firm’s core life insurance operations (over 55% of its adjusted earnings). Unique relative to its peers, Sun Life derives around 43% of adjusted earnings from its capital-light asset management business and wealth business, which bolsters its return profile.

There are two major sources of earnings for life insurers: underwriting profit (earned premiums minus claims and operating costs) and investment income (yield on the investment portfolio). We view underwriting profit as the ultimate source of any economic moat since investment income tends to reflect higher risk-taking or luck rather than durable advantage, and investment losses can erode underwriting earnings. Most life insurance policies are long-duration and are backed by long-duration assets, making life insurers more exposed to the capital markets than property and casualty insurers.

We see little sign of brand-driven intangible assets in the life insurance industry, with consumers largely buying on price. Scale advantages are limited too, since variable commissions make up a material portion of operating costs. Additionally, underwriting advantages are hard to maintain, as morbidity rates, mortality rates, and lapse rates are highly predictable. Technology-driven data analysis offers only marginal claims improvements before being competed away or passed to consumers through lower pricing.

Poorly structured life insurance policies (products with generous guarantees) can expose life insurers to heavy losses in a severe market downturn, and poor underwriting can pressure companies for many years and even result in bankruptcy. Because insurers do not know their cost of goods sold for many years, they can unknowingly underprice policies, and managers chasing growth over profitability can force competitors to match low prices or lose business.

Sun Life is one of the Big Three Canadian life insurers (along with Great-West and Manulife) that together capture over 80% of life insurance premiums in Canada. Sun Life’s Canadian segment contributed around 35% of its 2025 adjusted earnings. In its largest market, Sun Life derived around 44% of its earnings from group insurance (health and protection), 30% from individual insurance, and 25% from its wealth and asset management business. We don't think its Canadian life insurance is moaty, but we like its group benefits insurance business, as the life insurer can reprice the policies annually based on claims experience, and it is relatively capital-light compared with individual life insurance.

We don't view Sun Life’s US business as moaty; it represents around 17% of its adjusted earnings in 2025. The firm built its US operations through both organic investments and acquisitions, the largest being the USD 2.5 billion acquisition of dental benefits provider DentaQuest in 2022. Around 71% of its US earnings come from its group benefits business, 6% from its dental business, and the remaining 23% from its closed block of individual life and annuity products. Its US dental business is currently in turnaround, as it is still navigating headwinds from repricing in its Medicaid business after covid-19 and the budget cut in Medicaid. The transition to focus on commercial dental business will also take time.

The Asia segment contributed around 18% of Sun Life’s earnings in 2025; we assess it as having no moat. It is a pan-Asian operator with a presence in several markets, providing individual life insurance and wealth products. Sun Life is one of the top 10 life insurers by sales in Hong Kong and the third-largest MPF (Hong Kong government's Mandatory Provident Fund scheme) provider. Sun Life also has some other markets that it aspires to take a larger share in. We believe that the return profile in these smaller markets should improve as it achieves better scale.

We don’t believe that Sun Life’s asset management business (MFS and SLC) has a moat; it contributes around 30% of the firm’s earnings. Over 70% of its asset management earnings come from MFS, which we assess as not moaty. MFS has around USD 651 billion in AUM as of December 2025 and is the ninth-largest US retail asset manager. Despite a well-known brand, MFS' concentration in US active equity and US retail distribution exposes it to fee compression from broker/dealer and retail-advised network gatekeepers. Sun Life Capital Management, by contrast, managed around CAD 260 billion for third-party clients and around CAD 165 billion in AUM for its general accounts as of December 2025, with a focus on alternative assets.

SLC has made a few acquisitions that broadened its product capabilities. Lockup periods of alternative assets limit redemptions and retain assets. SLC's flows have been proportionately better, but it contributes only 16% of segment earnings. While we think Sun Life’s approach of actively growing its SLC business is the right move, its current earnings contribution is small and does not change our overall moat rating for the segment or the company.

Sun Life has a dominant position in many segments of the Canadian market and generates decent returns.

Sun Life generates about 40% of its adjusted earnings from the asset and wealth management business, which is less risky than its life insurance business and a source of relatively stable cash flows.

Sun Life’s Asian operations benefit from higher growth opportunities than its domestic market.

Sun Life could suffer from higher credit costs in the current private credit cycle, which would decrease profitability.

Sun Life offers a wide range of complex insurance products that expose it to underwriting, investment, capital market, and rate risks, making it difficult to predict the company’s overall risk exposure, especially during periods of economic turbulence.

The market for life insurance and income-based retirement products is competitive and commoditized, and it is difficult for firms to find value-accretive growth in mature markets like Canada and the US.