Executive Summary / Key Takeaways

• Sun Life Financial Inc. (SLF) demonstrates robust financial health and a commitment to shareholder returns, underpinned by a strong capital position and consistent dividend growth.
• The company's diversified business model, spanning asset management, Canadian financial services, U.S. health solutions, and high-growth Asian markets, provides resilience against market fluctuations.
• Strategic investments in digital transformation and artificial intelligence are enhancing operational efficiency, client experience, and competitive differentiation across its global operations.
• While facing specific challenges in its U.S. Dental business due to Medicaid redeterminations and U.S. medical stop-loss claims severity, disciplined pricing and proactive management actions are in place to restore profitability.
• SLF's asset management arm, particularly SLC Management, is a key growth driver, expanding alternative investment offerings and attracting significant capital, while MFS is adapting to market shifts through product diversification.

Setting the Scene: A Diversified Financial Powerhouse

Sun Life Financial Inc., founded in 1871 in Toronto, Canada, has evolved into a global financial services leader, offering a comprehensive suite of asset management, wealth, insurance, and health solutions to individual and institutional clients across diverse markets. The company's overarching strategy, the "client impact strategy," is built upon four strategic imperatives: leveraging asset management capabilities, accelerating momentum in Asia, deepening its impact along the client health journey, and operating as a digital company. This diversified approach positions Sun Life as a resilient player in a competitive industry landscape.

The financial services sector, particularly in North America, is characterized by intense competition from established players such as Manulife Financial Corporation (MFC), Great-West Lifeco Inc. (GWO), and Power Corporation of Canada (POW). Sun Life maintains a strong relative position, particularly in life insurance and wealth management, where it is recognized for its stability and customer focus. Its competitive advantages include a strong brand presence in Canada, unique distribution channels, and the necessary regulatory licenses that enable comprehensive product offerings. This brand strength fosters customer loyalty, potentially leading to higher pricing power and stronger retention, which is crucial for stable revenue generation.

However, Sun Life also faces vulnerabilities, including a notable reliance on North American markets, which could limit revenue growth during global economic shifts compared to more internationally diversified competitors like MFC. Additionally, legacy systems could pose challenges to digital agility, potentially hindering its ability to compete with rivals investing heavily in advanced technologies. Broad industry trends, such as the accelerating adoption of AI in financial services and the increasing demand for data centers driving infrastructure investments, present both opportunities for efficiency gains and potential competitive pressures.

Technological Edge: Fueling Efficiency and Client Impact

Sun Life is making substantial progress in advancing its digital leadership, with generative AI capabilities emerging as a core technological differentiator. The company is actively scaling generative AI across its operations, involving thousands of employees in over 20 experiments aimed at optimizing, automating, and transforming client experiences and internal processes.

The tangible benefits of this technological push are becoming evident across various segments. In the Philippines, a new automated underwriting platform has resulted in a 50% increase in straight-through processing, significantly enhancing the client experience through faster turnaround times and delivering operational efficiencies. The U.S. dental team is leveraging generative AI to improve accuracy and expedite recommendations, streamlining critical functions. In Canada, the launch of the Adviser Notes Assistant, a generative AI tool, is designed to enhance client experience and streamline advisor workflows. Similarly, in Hong Kong, an AI chatbot called Adviser Buddy has been piloted to support advisors throughout the sales journey. Furthermore, the implementation of straight-through processing for supplemental health accident insurance in the U.S. is improving productivity and client experience.

These technological advancements contribute significantly to Sun Life's competitive moat. They enable the company to operate more efficiently, reduce costs, and deliver superior client and advisor experiences, thereby strengthening its market positioning and supporting its long-term growth strategy. The strategic intent behind this R&D is to drive meaningful client impact, efficiency, innovation, and growth through digital leadership.

Diversified Growth Engines: Segment Performance and Strategic Initiatives

Sun Life's diversified business model is reflected in the performance and strategic initiatives across its key segments: Asset Management, Canada, Sun Life U.S., and Asia.

Asset Management

The Asset Management segment, encompassing MFS Investment Management (MFS) and SLC Management, is a cornerstone of Sun Life's strategy. Total Assets Under Management (AUM) reached an all-time high of $1.5 trillion in the third quarter of 2024, establishing Sun Life as Canada's largest asset manager based on AUM.

MFS continues to deliver solid earnings, with underlying net income of USD 184 million in Q2 2025, though down 5% year-over-year, primarily due to lower fee income from reduced average net assets. Its pretax operating net margin stood at 35.1%. Despite experiencing net outflows of USD 14.3 billion in Q2 2025, reflecting equity market volatility and secular shifts from active to passive management, MFS's total gross sales are up year-over-year. The company is strategically addressing these challenges by diversifying its offerings, including the launch of five active ETFs in Q4 2024 and experiencing good net inflows in its fixed income business. Management remains optimistic about a return to positive net flows as market dynamics normalize and interest rates potentially decline.

SLC Management, focused on alternative asset management, is a significant growth driver. It generated underlying net income of $45 million in Q2 2025, up 7% year-over-year, with fee-related earnings surging 37% to $89 million, driven by strong capital raising. Capital raising reached $6 billion in Q2 2025, doubling over the prior year, with strong activity in Crescent U.S. Direct Lending and Crescent Solutions funds. Deployments also remained strong at $6 billion. SLC Management is on track to achieve its 2025 underlying net income target of $235 million, with a medium-term objective of 20% growth in underlying earnings and fee-related earnings. Strategic moves include the acquisition of the remaining 20% interest in InfraRed Capital Partners in Q3 2024, the unveiling of SLC Global Insurance Group, and the launch of the Scotia Private Real Estate Fund. Crescent also launched Crescent GP Financing Solutions, a specialized private credit strategy.

Canada

The Canadian segment reported underlying net income of $379 million in Q2 2025, a 6% decrease year-over-year, primarily due to lower investment results and less favorable insurance experience, despite strong business growth. The Wealth and Asset Management business, driven by Group Retirement Services (GRS), saw continued strength with assets exceeding $200 billion in Q2 2025, up 12% year-over-year. The launch of MyRetirement Income, an innovative solution for retirees, highlights the focus on longevity needs. In Group Health and Protection, sales were up 41% year-over-year in Q2 2025, driven by large case wins. Sun Life also plays a critical role as the administrator of the Canadian Dental Care Plan (CDCP), having enrolled 2.7 million Canadians and processed 2 million claims by Q3 2024. Individual Protection earnings were down 16% year-over-year in Q2 2025, with sales down 19% year-over-year. However, the introduction of Sun Life Term Insurance for Diabetes in Q2 2024 represents a "first of its kind insurance solution" designed to empower Canadians living with diabetes.

Sun Life U.S.

The U.S. segment's underlying net income was USD 143 million in Q2 2025, down 4% from the prior year. The Employee Benefits business achieved record earnings and margins in Q2 2025, demonstrating strong performance. The stop-loss business also performed well, with Q2 2025 results in line with expectations. Despite industry challenges, Sun Life's leadership position, capabilities, expertise, and scale in the stop-loss market are serving it well. The full-year 2024 loss ratio for stop-loss was 74%, slightly above the 73% target. The company achieved a 14% pricing increase on January 1, 2025, renewals and anticipates needing an "additional 2%" price increase to address persistent claims severity. Three key drivers of this severity include more advanced cancer cases, a significant increase in premature births and neonatal care, and rising hospital prices. Sun Life maintains a conservative pricing approach, aiming for appropriate rates rather than aggressively pursuing market share.

The U.S. Dental business continues to face headwinds, primarily from the Medicaid redetermination process following the end of the public health emergency. State governments disenrolled approximately 19% of Sun Life's Medicaid membership base over the past 12 months, impacting premiums and leading to higher utilization and loss ratios among remaining members. Consequently, management no longer expects the business to achieve USD 100 million in earnings for 2025 and is reforecasting its earnings trajectory. Uncertainty around Medicaid funding has slowed repricing actions, and it is expected to "likely take through 2026 to get the rates back to full expected margins." Despite these challenges, Sun Life is the largest dental benefits provider in the U.S. with approximately 35 million members as of Q3 2024. The company is implementing a multi-pronged strategy including ongoing cost and expense management, repricing efforts on its existing Medicaid book (61% of needed pricing achieved by October 1, 2024), and securing new contracts across Medicaid, Medicare Advantage, and commercial business lines. Management remains confident in the long-term outlook for Dental, expecting it to contribute at least one-third of the overall U.S. segment's 12% plus medium-term underlying earnings growth objective.

Asia

Asia posted a record underlying net income of $206 million in Q2 2025, up 13% year-over-year on a constant currency basis. Individual Protection sales were up 22% year-over-year, with bancassurance distribution sales increasing 14% year-over-year. Hong Kong saw robust protection sales growth of 35% across all channels. The Asset Management and Wealth businesses delivered a record quarter, with earnings growing 67% over the prior year, driven by strong AUM growth. The India Asset Management joint venture experienced a nearly doubling of net wealth sales and a 21% year-over-year increase in wealth assets. Total Asia CSM grew 23% year-over-year to $6.2 billion in Q2 2025, with new business CSM up 34% to $299 million. Strategic investments include a further investment in Bowtie, a fast-growing digital insurer in Hong Kong, and an expanded partnership with CIMB Niaga (BNGA) in Indonesia.

However, the Asia segment also faces specific risks. In Q4 2024, an impairment charge was recognized on an intangible asset related to bancassurance agreements in Vietnam due to significant industry weakness and macroeconomic factors, with bancassurance sales declining over 60% in the past two years. Additionally, a regulatory change in Hong Kong's Monetary Provident Fund Scheme Authority will result in a reduction of approximately CAD 10 million per quarter in fees for Sun Life.

Financial Health and Capital Strength

Sun Life's financial performance in Q2 2025 underscored its resilience, with underlying EPS of $1.79, up 4% year-over-year, and an underlying net income exceeding $1 billion. The underlying Return on Equity (ROE) was 17.6%. For the full year 2024, underlying net income increased 3% to $3.9 billion, and total assets under management reached $1.54 trillion.

The company maintains a strong capital position, reflecting its financial discipline and emphasis on capital-light businesses. The LICAT ratio at SLF stood at 151% in Q2 2025, up 2 points from the prior quarter. Organic capital generation, net of dividends, was robust at $673 million in Q2 2025, exceeding the target range of 30% to 40% of underlying net income. Holdco cash remained solid at $1.1 billion after returning almost $1 billion to shareholders during the quarter, and the leverage ratio remains low at 20.4%. Sun Life actively returns value to shareholders, repurchasing 4.8 million shares in Q2 2025 and announcing an intention to renew its normal course issuer bid for up to 15 million common shares. The quarterly common share dividend was increased by 4 cents to $0.88 per share, representing a 51% payout ratio.

To further enhance efficiency, Sun Life initiated an enterprise-wide restructuring program in Q2 2024, targeting over $200 million in pre-tax savings by 2026, with 80% of these efficiencies expected by the end of 2025. These savings, predominantly flowing through earnings, are designed to support the achievement of the "higher end of our EPS growth target" and generate positive operating leverage.

While the company's financial health is strong, it acknowledges certain risks. Real estate returns have been flat and below long-term expectations, consistent with broader industry headwinds. Adverse credit impacts, such as the $43 million charge in Q3 2024, have been isolated to a few credits and represent a small fraction of assets. Tax volatility, as seen in Q4 2024 due to lower tax-exempt income from the strengthening U.S. dollar, is being addressed with actions to mitigate future fluctuations, though this may result in a modest reduction in the overall tax benefit.

Conclusion

Sun Life Financial Inc. stands as a resilient and strategically focused financial services leader, leveraging its diversified business model, strong capital base, and commitment to digital innovation to drive long-term value. The company's strategic imperatives in asset management, Asia, health solutions, and digital transformation are yielding tangible results, from record earnings in Asia and SLC Management's robust capital raising to the widespread deployment of generative AI for enhanced efficiency and client experience.

Despite facing specific challenges in its U.S. Dental and medical stop-loss businesses, Sun Life's disciplined pricing, proactive management actions, and long-term outlook underscore its ability to adapt and restore profitability. Its strong capital position, consistently high LICAT ratio, and healthy organic capital generation provide the flexibility to fund organic growth, maintain a competitive dividend, and execute share buybacks. Sun Life's technological leadership, particularly in AI, is not merely an operational enhancement but a strategic differentiator that strengthens its competitive moat and underpins its ability to achieve its medium-term financial objectives. Investors looking for a company with a diversified earnings stream, strong capital management, and a clear strategic roadmap for growth, even amidst market-specific headwinds, will find Sun Life's investment thesis compelling.