Canada’s second-largest insurer missed analysts’ expectations after its first-quarter earnings were hit by higher morbidity claims, the sale of its U.K. business and the end of the public-health emergency in the United States.
Sun Life Financial Inc. SLF-T reported “underlying” net income of $875-million, or $1.50 a share, for the first three months of the year, down from $895-million, or $1.52 a share, in the same period last year. Underlying net income strips out investment losses and makes other accounting adjustments. Analysts had expected income of $1.65 a share, according to LSEG data.
Shareholders drove Sun Life’s shares down almost 5 per cent on Friday morning trading to as low as $69.04 on the Toronto Stock Exchange.
Chief executive officer Kevin Strain attributed the missed earnings mostly to the higher number of morbidity claims in the United States – more individuals contracting certain illnesses – as well as lower sales in DentaQuest, a Sun Life subsidiary that is one of the largest providers of U.S. Medicaid dental benefits.
“Our U.S. dental business continued to experience negative impacts from the end of the public-health emergency driven by Medicaid member disenrollment and higher claims ratios on the remaining members,” Mr. Strain told analysts Friday.
During the pandemic, the government could not disenroll people from Medicaid. Individuals were automatically re-enrolled, even if they were no longer eligible. That came to an end in May, 2023. Since then, Sun Life has seen a bump in disenrollment in Medicaid membership across multiple states, affecting its overall DentaQuest business. Sun Life U.S. president Dan Fishbein told analysts the government’s disenrollment is expected to be complete by the end of June.
“That’s a 14-month process by regulation,” Mr. Fishbein said during an earnings call. “So, there likely are some additional membership declines still in progress and still ahead of us. The primary result that’s affecting our results is not just the membership itself, but the fact that those who were no longer eligible for coverage were utilizing care at a meaningfully lower rate than those who remained in the programs.”
The impact on earnings should lessen as individual states begin to adjust their Medicaid rates, which is mostly done on an annual basis, Mr. Fishbein added. Already, about 25 per cent of the contracts have new rates established, with the remaining 75 per cent to be done by the end of the year.
Mr. Strain said he expects dental results to return to prior levels of profitability and “be more consistent” with pricing targets. He expects income levels for dental to be about US$100-million for 2025, a target the insurer had originally wanted to hit in 2024.
Outside the U.S., the insurer also saw a drop in net income from individual insurance sales, down about $13-million overall for the quarter. The decline was driven by lower earnings after the sale of Sun Life UK in 2023, but offset by stronger sales in Asia, which were up $38-million for the quarter.
Sun Life Asia reported positive results for the quarter, with underlying net income of $177-million, up 26 per cent year-over-year. The region continues to see strong sales momentum for both wealth and insurance in Hong Kong after a period of prolonged pandemic lockdowns. Other regions such as Vietnam, Indonesia, China and India experienced slower insurance sales, but Mr. Strain said in an interview that he anticipates those markets to rebound.
“Vietnam and Indonesia are two regions that had the most negative impact for us this quarter,” he added. “But we are working our way through those and we feel long-term that those are both really good markets.”
Sun life’s results are in contrast with those of Canada’s largest insurer, Manulife Financial Corp., which on Wednesday reported a jump in its first quarter “core earnings” of $1.75-billion, or 94 cents a share, compared with $1.53-billion or 79 cents a share in the first quarter of 2023.
The boost in earnings, which beat analysts’ expectations of 91 cents per share, according to LSEG data, was largely owing to Manulife’s continued strength in Asia.
“We generated 44 per cent of earnings from the Asia region,” Manulife chief financial officer Colin Simpson said during a call Thursday. “As you can see, Asia continues to play a pivotal role in our earnings growth.”
With a file from David Milstead
Clare O’Hara