We are reiterating our Neutral recommendation on Sun Life Financial Inc. ( SLF). Though we believe the company will be able to generate superior returns for its investors given a proactive approach to managing and mitigating fundamental issues, concerns such as ongoing macro and regulatory uncertainties and low interest rates keep us on the sidelines. Sun Life carries a Zacks Rank #3 (Hold).
Sun Life is a leading Canadian life insurance company, with an active presence in the U.S. The company is seeking to grow internationally. It is specifically focusing on the emerging economies of Asia, which are expected to provide higher return and growth compared to other developed markets.
Sun Life is also making business mix changes in its U.S. segment to reduce the equity market exposure and limit its interest rate exposure. This is being effected through penetration in business lines that can generate higher return on equity.
At the same time, Sun Life is aggressively seeking to grow its Global Asset Management Business, which has been witnessing growing asset base for the past many quarters. This business provides higher return on equity with lower capital, and lower volatility. It has the potential to provide 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 management of these risks.
Nevertheless, these positives are partially offset by the low interest rate environment that is expected to continue to have a significant negative impact on Sun Life's operations. The leverage ratio has also increased due to requirement for additional regulatory capital.