21 June 2007

Sun Life Investor Day

Financial Post, Duncan Mavin

Citigroup analyst Colin Devine was largely unimpressed with Sun Life Financial Inc.’s investor day it seems.

“Not a lot of new information,” he says in a note. “The meeting did not yield any basis to change our opinion on [Sun Life’s] relative attractiveness nor did it cause us to change our earnings estimate.”

Mr. Devine left his target price for Sun Life’s stock at $55.

Nevertheless, the analyst did find a spark of interest. “One exception [to the lack of new material] was the news management has found a funding solution for the U.S. life insurance line where surplus strain from new sales has meaningfully been squeezing earnings.”

Sun Life announced it is implementing a new U.S. domestic funding solution, which includes reducing new business strain in the remainder of 2007. Management also said the company is continuing to pursue alternative funding structures.

Sun Life also highlighted the turnaround at money manager MFS Investment Management and its expanding Asian operations. “They remain relatively small contributors,” Mr. Devine.

In the absence of any more exciting news from Sun Life, it will take “a major upward move by Sun U.S. to make the company’s shares attractive,” he added.
Scotia Capital, 21 June 2007


• This note follows our "Investor Day Announcements" note released this morning, and attempts to quantify the EPS impact of two significant announcements, namely the 66% increase in U.S. variable annuity sales in the first five months of 2007 (better than expected) and the U.S. individual insurance funding arrangement (put in place now much faster than expected). We are leaving our numbers unchanged for now.

What It Means

• We expect the funding arrangement could increase 2007 EPS by $0.05 to $0.07 in 2007. We had previously expected it to be fully in place by the end of Q4/F07, not in Q2/F07 as was announced today. The funding arrangement should likely reduce strain by US$20M to US$25M (after tax) for the remainder of 2007, with an additional US$13M to US$16M in the second half of 2007 as the funding arrangement allows for the recovery of the additional strain booked in Q4/F06 and Q1/F07.

• Assuming the pace of U.S. variable annuity sales continues at the clip over the last two months (US$529 million) for the remainder of 2007, with a modest 10% increase in 2008, we would increase our EPS estimates by $0.01 in 2007 and $0.03 in 2008.
RBC Capital, 21 June 2007

Investment Opinion

Highlights from the investor day include: (i) New funding structure for U.S. insurance operations, which should have a positive impact on near-term earnings; (ii) Management's expectations for further expansion in margins at MFS; (iii) Impressive U.S. variable annuity sales growth, up 66% YoY (year-to-date); and (iv) Management's expectation that China and India operations will not be profitable until 2010.

Investment Thesis

Sun Life is currently trading at 12.6x 2007E earnings compared to its 5-year average of 12.1x and the current lifeco median of 13.6. However, Sun Life is highly capitalized, has exposure to large asset management businesses and has a well-positioned domestic group platform. Also, the company would benefit more than banks from rising interest rates, while it would be less impacted by deteriorating credit quality. The discount to Manulife and Great-West is justified, in our view. Sun Life's international platforms are less well established than Manulife's, while earnings quality and medium-term embedded value growth has been weaker. Compared to Great-West, Sun Life is more exposed to deteriorating credit quality and has less upside potential from recent acquisitions. Our 12-month price target remains $57.
Financial Post, Duncan Mavin, 21 June 2007

Sun Life Financial Inc. said yesterday it has approval to sell insurance in booming Shanghai, and revealed its plans for growth in China are focused on cities most Canadians have likely never heard of.

The economic boom in China's mega-cities such as Shanghai, Beijing and Guangzhou has attracted dozens of financial institutions from around the world that have opened up business there.

But a key focus of Sun Life's China strategy is the so-called "tier-two" cities, the 20 to 40 cities that are smaller than the biggest centres but still large by North American terms, said Stephan Rajotte, president of Sun Life's operations in Asia.

The life-insurance market will expand by 70% in the next three years in the cities Sun Life is targeting such as Jinan, Nanjing and Chengdu, according to consultants McKinsey and Co.

There are fewer foreign competitors in those cities, said Mr. Rajotte, who was speaking at Sun Life's annual investor day in Toronto yesterday via video conference from Hong Kong.

Although a handful of big-name Chinese cities attract most attention in the West, there are dozens of others that are growing economically and in size, said Paul Beamish, director of the Asia Management Institute at the University of Western Ontario's Richard Ivey School of Business.

"Most people in this part of the world know very little about the reality of the Chinese market in terms of the number of cities that are quite large," Mr. Beamish said.

"There are three or four cities in Canada with a million people, and maybe a dozen in the U.S. But in China there's a hundred cities that most people don't know about that have a million people in them."

Sun Life operates in China through a joint venture, Sun Life Everbright Life Insurance Co.

Yesterday's announcement that the company has received China Insurance Regulatory Commission preparatory approval for Shanghai is a step toward full approval to begin operations there, which will bring to 14 the number of cities in China in which the joint venture operates. Based on experience in other Chinese cities, Sun Life expects to be able to begin selling insurance in Shanghai by the fourth quarter of 2007, a company spokesman said.

Sun Life also announced yesterday that its gross sales of U.S. variable annuities have exceeded US$1-billion for the first five months of 2007,marking a 66% increase over the same period last year.

Don Stewart, Sun Life chief executive, attributed the higher sales to a new product and better distribution.
The Globe and Mail, Tara Perkins, 21 June 2007

Sun Life Financial Inc. expects that its Canadian operations will be a significantly smaller part of its bottom line in the not-so-distant future.

Just under half of the insurer's profit last year came from its home country. But Sun Life believes it can begin breaking even in India and China by 2010. That growth in Asia, coupled with growth in the U.S., means "you will see the percentage change; it will drop," chief financial officer Rick McKenney said in an interview following the company's investor day yesterday in Toronto.

Sun Life revealed yesterday it received approval last week to start operating in Shanghai. It hopes to begin selling products there in the fourth quarter.

But its strategy in China is to concentrate on so-called "tier 2" cities such as Jinan, Nanjing and Chengdu, where fewer foreign competitors are active, said Stephen Rajotte, president of Sun Life Financial Asia.

Those locations are also more attractive because insurance penetration is currently about 2 per cent of gross domestic product, compared with 4 per cent in the larger cities such as Shanghai, Beijing and Shenzhen.

Sun Life now has approval to operate in 14 cities in China.

Excluding Japan, Asia accounted for about 10 per cent of the world's insurance market in 2005, and that's projected to grow to 23 per cent by 2020. Japan, where the market is already more developed, accounted for 19 per cent of the total world insurance market in 2005. That's expected to fall to 13 per cent by 2020. North America's share is expected to dwindle from 28 per cent to 23 per cent.

Sun Life's Asian operations contributed 5 per cent of the company's bottom line last year, earning $101-million.

The insurer is also hoping that some acquisitions will fuel its growth abroad. "We're continually looking at acquisition opportunities in the U.S. and in other locations as well," Mr. McKenney said.

"We have excess capital, and we'd like to acquire some businesses," he added, noting Asia is another hunting ground.

Sun Life is "a national champion. I think it's important for Canada to have national champions," he added.

The company also said yesterday that its U.S. variable annuity gross sales topped the $1-billion (U.S.) mark in the first five months of this year, an increase of 66 per cent over the same period last year.
Bloomberg, Sean B. Pasternak, 20 June 2007

Sun Life Financial Inc., Canada's third-biggest insurer, plans to expand in Chinese cities such as Nanjing where it says demand for insurance will grow faster than in the biggest cities, Asia President Stephan Rajotte said.

Most of Sun Life's foreign competitors are focusing on places such as Shanghai and Beijing, Rajotte said today at an investor conference in Toronto. Sun Life plans to target the next 20 to 40 largest cities such as Jinan and Nanjing, he said.

``That's where we feel there's the highest growth potential,'' Rajotte said today. ``The middle class is where we're focusing our geographic expansion.''

Life insurance in the so-called ``Tier 2'' cities is expected to grow 70 percent in the next few years, compared with 40 percent in larger municipalities, Rajotte said.

Sun Life also announced today it received approval from the China Insurance Regulatory Commission to operate a life insurance joint venture in Shanghai.

Separately, Sun Life said today that gross sales of variable annuities in the U.S. were at least $1 billion for the first five months of 2007. That's a 66 percent increase from the year- earlier period.

``It really shows the fruition of a strategy we've had in place for some time,'' Chief Financial Officer Richard McKenney said in an interview following the meeting. ``We obviously want to see that momentum continue, but we're happy with the early indications.''

Shares of Toronto-based Sun Life rose 70 cents, or 1.4 percent, to C$49.94 at 4:15 p.m. trading on the Toronto Stock Exchange, the biggest gain in a month.
Reuters, 20 June 2007

Shares of Sun Life Financial Inc. rose as much as 2.5% on Wednesday after Canada's third biggest life insurer announced an expansion into China's richest city as well as sturdy insurance sales in the United States.

Sun Life made the announcements as part of an "investor day" in Toronto, at which company executives also sketched out a tough environment for acquisitions with prices propelled by strong equity markets and a superabundance of available funding worldwide.

"Acquisitions that are out there are difficult. The market is tight," said Chief Financial Officer Rick McKenney.

Sun Life's most recent acquisition was the US$650-million purchase in January of Genworth Financial Inc.'s employee group benefits business. But analysts have speculated that more U.S. buys could be in the offing as the company generates around US$1-billion in free capital each year.

Sun Life has frequently said it is comfortable with acquisitions around the US$500-million to US$700-million range, but McKenney said that was not an upper limit.

"We would do larger acquisitions if they presented themselves," he told Reuters in a telephone interview.

McKenney also told investors that Sun Life's order of priority for its cash was: Grow organically, pay dividends, make acquisitions, and finally, if no acquisitions materialized, return money to shareholders through its share repurchase program.

Earlier, Sun Life said its Chinese joint venture, Sun Life Everbright Life Insurance Co., had received "preparatory approval" from regulators in China to start operations in Shanghai, the country's economic center.

The company, which operates in 14 Chinese cities, said it expects sales from the Shanghai unit to begin in the fourth quarter, subject to approvals.

"China will take a bit of time but it is critical for us to be there," said Stephan Rajotte, president of Sun Life Asia.

Sun Life also announced that its life insurance variable annuity sales in the United States exceeded US$1-billion for the first five months of this year, two-thirds more than in the same period last year.