Sun Life Financial Inc. · TSX:SLF
Sun Life Financial — Q2 2002 Earnings Presentation
45 slides from Sun Life Financial's earnings presentation, Jul 31, 2002
Slide 1: Analyst Presentation: Financial and Operating Results
Analyst Presentation Financial and Operating Results Second Quarter 2002 July 31, 2002
Slide 2: Forward Looking Information
Forward Looking Information This presentation contains forward looking statements with respect to the Company, including its business operations and strategy and financial performance and condition. Although Management believes that the expectations reflected in such forward looking statements are r
Slide 3: Second Quarter 2002 - Overview
Second Quarter 2002 - Overview • Net income of $71 million • Record operating earnings of $293 million or 59 cents per share • Restructuring charge of $217 million (after-tax) includes recommissioning costs • Net telecom debt write-downs of $45 million • Expensing stock options reduced earnings by $
Slide 4: Second Quarter 2002 - Overview (cont'd)
Second Quarter 2002 - Overview (cont’d) • Keyport added 7 cents to 2Q’02 EPS • Positive inflows at MFS • Decisive actions have mitigated impact of market declines – Aggressive cost cutting – Accretive impact of Keyport integration • Disciplined risk management culture – Continuous management of earn
Slide 5: Shareholders' Net Income
Shareholders’ Net Income ($ Millions) 293 243 256 35 } Clarica 212 215 258 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Operating Earnings 212 215 243 256 293 (1) Special Items - - 10 - (222) Reported Earnings 212 215 253 256 71 (1) The amount for Q2 2002 represents primarily after-tax restructuring and other char
Slide 6: Special Items - Q2 2002
Special Items - Q2 2002 Cents $ millions per share Earnings Before Stock Options 300 60 Stock Options (7) (1) Operating Earnings 293 59 Special Items Clarica Restructuring (217) (44) Additional US Loan Loss Provisions (45) (9) Tax Settlements 29 6 Miscellaneous 11 2 Total Special Items (222) (45) Re
Slide 7: Restructuring Costs
Restructuring Costs ($ millions) Forecast Accrued (Dec 17/01) Restructuring Costs, Pre-Tax Restructuring 555 555 Recommissioning and Other 103 - Total 658 555 Income Taxes 170 125 Total Restructuring Costs, After-Tax 488 430 Capitalized - Clarica 214 129 - Sun Life 57 59 Expensed - Sun Life 217 242
Slide 8: Financial Performance
Financial Performance EPS (cents) ROE 60 59 59 16.0% 57 55 51 14.0% 50 50 12.0% 45 10.0% 40 35 8.0% Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Operating EPS 50 51 57 59 59 ROTE (1) (2) 15.1% 16.6% 15.7% ROE (2) 12.6% 12.5% 12.9% 13.2% 11.7% (1) Return on tangible shareholders’ equity (ROTE) is based on tangible
Slide 9: Premiums and Segregated Fund Deposits
Premiums and Segregated Fund Deposits ($ Billions) 5.9 5.2 4.5 4.0 3.2 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Segregated Fund 1.5 1.0 1.5 1.5 1.5 Deposits Premiums 2.2 1.9 2.7 3.4 4.0 ASO Premium 0.3 0.3 0.3 0.3 0.4 (1) Equivalents (1) Represents in-force Administrative Services Only (ASO) premium equivalent
Slide 10: First Year Annualized Premiums
First Year Annualized Premiums ($ Millions) Individual Life & Health Group Life & Health 202 130 129 130 116 128 103 100 74 66 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 U.S. - BOLI (1) 19 8 111 16 3 Canada 23 26 21 43 25 U.S. - Individual 28 29 46 79 57 -ASO 21 20 12 14 10 Canada 1
Slide 11: Assets Under Management
Assets Under Management ($ Billions) 352 357 369 326 299 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Mutual Funds 158 137 153 152 131 Managed Funds and 66 61 70 75 66 Other Segregated Funds 46 43 49 49 54 General Funds 56 58 80 81 118 11
Slide 12: Total Net Fund Sales
Total Net Fund Sales Net New Sales Market and Currency ($ Billions) Movements ($ Billions) 8.1 26.4 5.2 4.1 3.3 2.4 3.8 -2.6 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Mutual Funds -33.6 -37.9 Gross New Sales 10.3 8.1 8.7 9.6 8.0 Redemptions -6.4 -7.3 -7.3 -8.2 -9.0 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Net New Sales 3.
Slide 13: MFS - Top U.S. Mutual Fund Companies
MFS - Top 10 U.S. Mutual Fund Companies Net New Assets Flows (June 30/02) (YTD Q2/02) ($US Billions) 1 Fidelity 490 9.2 2 Vanguard 470 27.0 3 American Funds 338 26.7 4 Franklin Templeton 157 4.3 5 Putnam 156 (5.3) 6 PIMCO Funds 98 14.6 7 Janus 89 (7.2) 8 T. Rowe Price 82 2.6 9 OppenheimerFunds 78 4.
Slide 14: U.S. Annuity Sales
U.S. Annuity Sales (US$ Millions) 1,458 1,200 1,007 791 540 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Gross Sales Variable Annuities 791 540 714 1,084 611 Fixed Annuities - - 238 314 519 Indexed Annuities - - 55 60 70 Total Gross Sales 791 540 1,007 1,458 1,200 Net Sales Variable Annuities 283 10 54 276 (278) F
Slide 15: Revenue
Revenue ($ Millions) 5,931 5,413 4,885 3,945 3,526 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Fee Income 819 762 803 820 824 Investment Income 925 891 1,363 1,160 1,150 Life & Health 1,256 1,216 1,384 1,345 1,664 Premiums Annuity Premiums 945 657 1,335 2,088 2,293 15
Slide 16: Operating Expenses
Operating Expenses ($ Millions) Non-MFS MFS 411 40% $300 60% $400 357 356 262 248 255 298 315 30% 235 242 $300 20% $200 40% $200 $100 10% $0 0% $100 20% Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 13 15 6 - - Operating 262 235 248 255 242 Sun Bank/SLCAM Expenses (1) Keyport/IFMG - -
Slide 17: Financial Strength
Financial Strength (1) Debt to Total Capital MCCSR 299% 284% 25.8% 23.2% 23.2% 206% 190% 193% 19.8% 19.3% Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 (1) Includes preferred shares issued by Clarica and SLEECS as part of debt capital. 17
Slide 18: Canadian Operations
Canadian Operations ($ Millions) 120 1,200 Net Income 80 Revenue 800 40 400 0 0 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Revenue 932 896 997 982 1,323 Net Income 55 51 57 61 94 ROTE 18.5% ROE 17.6% 16.5% 18.6% 20.0% 12.3% 18
Slide 19: U.S. Annuity and Insurance Operations
U.S. Annuity and Insurance Operations ($ Millions) 3,000 120 Net Income Revenue 2,000 80 1,000 40 0 0 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Revenue 1,755 1,528 2,507 3,314 3,370 Net Income 27 55 90 98 75 ROTE 14.9% 12.9% 8.7% ROE 7.7% 15.1% 10.6% 8.7% 6.1% 19
Slide 20: Keyport Integration Well Ahead of Target
Keyport Integration Well Ahead of Target • At today’s run rate, Keyport exceeds 2002 targeted savings of C$20-25 million (after-tax) • The 2003 targeted cost savings run rate of C$32 million (after-tax) will be achieved by year-end 2002 • Sun Life and MFS products actively distributed through IFMG c
Slide 21: MFS
MFS 1,234 S&P 500 (average) Assets Under Management 1,154 1,132 1,115 ($ Billions) 1,070 80 220 218 220 192 60 Net Income (1) 186 ($ Millions) 40 20 0 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Mutual Funds 149 129 146 145 122 Net Income 65 58 50 47 58 Managed Funds 71 63 72 75 64 R
Slide 22: U.K. Operations
U.K. Operations ($ Millions) 600 80 60 Revenue Net Income 400 40 200 20 0 0 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Revenue 538 449 523 464 537 Net Income 50 37 54 42 66 ROE 17.5% 12.2% 19.9% 20.1% 32.7% 22
Slide 23: Asia Operations
Asia Operations ($ Millions) 200 25 150 Net Income Revenue 15 100 5 50 0 -5 Q2/01 Q3/01 Q4/01 Q1/02 Q2/02 Revenue 106 107 148 123 185 Net Income 10 3 (1) 2 4 ROE 8.6% 2.5% -0.8% 1.6% 3.3% 23
Slide 24: Stable Earnings in Volatile Markets
Stable Earnings in Volatile Markets • In aggregate, core franchise earnings are positive: – Strong earnings from U.S. group and individual operations – UK turnaround exceeding expectations – Keyport operations accretive – Canadian Operations on track to meet or exceed expectations – Asia reinvesting
Slide 25: Stable Earnings in Volatile Markets (cont'd)
Stable Earnings in Volatile Markets (cont’d) • High Performance and Disciplined Investment Group – Underweight in exposure to recent credit events – Reduced Keyport below investment grade portfolio from US$1.2 billion to US$650 million • Strong risk management and Earnings At Risk focus with: – Acti
Slide 26: Stable Earnings in Volatile Markets (cont'd)
Stable Earnings in Volatile Markets (cont’d) • Recurring earnings trend continues: – Approximately 18% of earnings directly tied to equity markets – Core franchise earnings are strong – Strong risk management and conservative balance sheet • Non-recurring earnings expected to make net positive contr
Slide 27: Clarica Integration Update
Clarica Integration Update Bob Astley, President, Sun Life Financial Canada 27
Slide 28: Overview
Overview • Integration - on track to achieve cost savings • Building for the future - outstanding progress • Strong governance and project controls • Business momentum maintained • Key challenges identified and manageable 28
Slide 29: Integration
Integration • Plans identified to achieve savings targets • One time integration costs – on plan • Focus on staff counts – key driver of expenses 29
Slide 30: FTE Reductions
FTE Reductions FTE - January 1, 2002 9351 - July 24, 2002 9115 Reduction to-date 236 Termination notices 1354 Planned attrition 200 Total Reductions 1790 30
Slide 31: Building for the Future
Building for the Future • Completely rebuilt organization • Canadian Executive Team (CET) - an outstanding leadership group • All staff reconfirmed, reassigned, or have termination notices • CI transaction closed July 25 • Amalgamation • Culture building • Organization health strong 31
Slide 32: Strong Governance and Project Controls
Strong Governance and Project Controls • Full time Integration Management Office (IMO) • Weekly monitoring by IMO and CET • Monthly scorecard • Risk management oversight 32
Slide 33: Business Momentum Maintained
Business Momentum Maintained • Quarterly results solid • ICA Channel – Record 313 recruits – 9th quarter of organic growth • GRS sales exceed $1 billion • Group retention excellent 33
Slide 34: Key Challenges - Identified and Manageable
Key Challenges - Identified and Manageable • Retail distribution – continue momentum of ICA – wholesale arm is a top priority • IT integration 34
Slide 35: Summary
Summary • Confidence in: – People – Plans – Project management • Will report to investors quarterly 35
Slide 36: Credit Overview
Credit Overview Claude Accum, Vice-President and Chief Investment Officer 36
Slide 37: Conservative Asset Portfolio
Conservative Asset Portfolio • 90% in Cash and Fixed Income Cash & Other • Bonds $68 B 8% Real Estate – $18 B in Government/Gtd 4% – 96% investment grade Stock 4% – 0.14% impaired • Mortgages $16 B – $2.3 B insured Mortgages 16% Bonds – 0.44% impaired 68% • Market Value exceeds Book Value • Prudent
Slide 38: High Quality Bond Portfolio
High Quality Bond Portfolio Worldwide Bond Portfolio • 33% AAA - overweight 40 Sun Life Industry • 24% BBB - strong expertise in US and Canada private Percent (%) 30 20 markets 10 • 4% BB & below - industry 0 norm AAA AA A BBB BB/- Sun Life 33 12 27 24 4 • UK portfolio: high Government Industry 29 1
Slide 39: Disciplined Approach to BB & Below
Disciplined Approach to BB & Below • Investment policy precludes Bonds (%) BB & below purchase of BB & below • Keyport assets marked to market 8 Sun Life Industry in October, Clarica in May 6 Percent (%) • Reduced Keyport BB & below from 4 US$1.2 B to US$650 mm (by sales) 2 • 4% BB & below - average
Slide 40: Canadian Corporate Portfolio Underweights High Risk Sectors
Canadian Corporate Portfolio Underweights High Risk Sectors • Underweight – Telecom & Technology $693 mm Canadian Bond Book vs Scotia Universe for Corporates Percent – Communication and Cable 40% $221 mm 35% – Transport $824 mm 30% Sun Life Scotia Universe • Overweight 25% – Energy Utilities $2.6 B
Slide 41: U.S. Corporate Portfolio Underweight High Risk Sectors
U.S. Corporate Portfolio Underweight High Risk • Underweight – Telecom US$890 mm Sectors – Energy US$1.1 B – Media & Publishing US$190 mm US Bond Portfolio vs Lehman Credit – Broadcast and Cable US$480 mm Percent • Overweight 16% Sun Life Lehman Credit – REITS US$614 mm - Sun Life has 14% recognized
Slide 42: Favourable Credit Risk Trendline
Favourable Credit Risk Trendline • Credit Risk of portfolio tracks close to Single A (even with mortgages included at bond equivalent credit ratings) • Credit Risk shows stable trendline over last 7 quarters • US portfolio: significant improvement in average Credit Risk over last 3 quarters despite
Slide 43: Modest Exposure to Names in News
Modest Exposure to Names in News NAME Q2 COMMENT LOAN PAR VALUE US$ mm Downgrades pre June 30, 2002 AT&T Canada 28 • 15 mm Clarica marked to market in May Adelphia - Enron - Finova - Global Crossing 3 KMart 29 Pacific Gas & Electric 11 Southern California Edison 49 Teleglobe 28 • 11 mm Clarica marke
Slide 44: Investment Highlights
Investment Highlights • Conservative portfolio - 90% cash and fixed income • Prudent investment philosophy: – Do not buy BB & Below – Derivatives - only used for hedging & matching (not for taking positions) – Do not buy things we do not understand – Do not buy residuals (first loss) of other compan
Slide 45: bed
bed r\ Sun “= we: Life Financial