We are reiterating our Neutral recommendation on Sun Life Financial Inc. (SLF). Though the company threw a positive earnings surprise of 4.8% during the third quarter of 2013, headwinds related to low interest rates and high expenses keep us on the sidelines.
Sun Life is a leading Canadian life insurance company, with an active presence in the U.S. Over the long term, we believe the company will be able to generate superior returns for its investors, given a proactive approach to managing and mitigating fundamental issues.
During the third quarter, the company reported earnings of 66 cents per share beating the Zacks Consensus Estimate of 63 cents. On a total company basis, sales of life and health products increased 6% and wealth sales were up 25%.
In a bid to grow internationally, Sun Life is specifically focusing on the emerging economies of Asia, which are expected to provide higher return and growth compared to the North American markets.
The company is also making business mix changes in its U.S. segment to reduce the equity market exposure and limit its interest rate exposure.
At the same time, Sun Life is aggressively expanding its Global Asset Management Business, which has been witnessing a growing asset base for the past several quarters. This business provides higher ROE, lower capital and lower volatility, and has the potential to provide an earnings upside.
Along with doing away with high equity/interest rate risk products, Sun Life has implemented hedging to reduce earnings and capital sensitivity to interest rates and equity markets. The company stands better than its peers in terms of hedging these risks.
Nevertheless, the historically low interest rate environment will continue to have a negative impact on the company’s operations.
Sun Life retains a Zacks Rank #3 (Hold). Better-ranked players like StanCorp Financial Group Inc. (SFG) with a Zacks Rank #1 (Strong Buy), and American Equity Investment Life Holding Co. (AEL) and Manulife Financial Corp. (MFC), both with a Zacks Rank #2 (Buy) are worth considering.