With Sun Life’s (SLF) executives preparing to host an investor day in New York on Thursday, RBC Capital Markets analyst Andre-Philippe Hardy is telling clients to expect good news.
The investor day will focus on the insurer’s U.S. operations, and Mr. Hardy expects two key topics to be on the table: the potential for growth at the company’s U.S. asset-management unit, MFS Investment Management, and sunnier skies for the variable annuity business.
MFS’s net redemptions of retail funds fell to $400 million in the latest quarter, from $800 million a year ago.
In a note to clients Monday, Mr. Hardy said he believes the business is now well-positioned to benefit from a continued rebound in the mutual fund industry. “Strong investment performance relative to peers has led to improved net sales and should be a catalyst for further market share expansion in upcoming years,” he wrote. “MFS currently captures approximately 1% of total industry gross sales. We believe a doubling of this market share by the end of 2012 is not out of the realm of possibility, given the company’s investment performance.”
MFS contributed $281 million to Sun Life’s bottom line in 2007, or 12.5% of total profits. Mr. Hardy expects the contribution in 2009 will be just over half the 2007 amount as a result of weak stock markets. But he thinks that the first half of 2009 will prove to have been the bottom for MFS. “Annual profit contribution of $520 million to Sun Life would not be out of the realm of possibilities under the right set of circumstances.”
Meanwhile, he told clients that profits from the variable annuity and segregated fund products that are already out there will probably be lower than in recent years, but “the new versions of variable annuities being sold by the industry should be more profitable on a risk-adjusted basis.”
Insurers with large variable annuity businesses took a beating when stock markets tanked (most notably Manulife (MFC), because its large equity portfolio was unhedged), and have since been changing the products they sell, reducing some of the benefits and guarantees and increasing the prices.
Mr. Hardy said he thinks Sun Life is in a good position to improve the profitability of this business, noting that its sales of U.S. variable annuities were $1.4 billion in the last six months compared to $0.8 billion for Manulife. Sun Life has been hiring wholesalers from competitors who are having more troubles, and two-thirds of its wholesalers are now new within the last year, giving it new distribution strength.
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