Executive Summary / Key Takeaways

• Sun Life Financial Inc. (SLFIF) delivered robust Q2 2025 results, with underlying net income increasing 2% year-over-year to C$1,015 million and underlying EPS rising 4%, demonstrating the resilience of its diversified business model.
• Asia and SLC Management are key growth engines, with Asia achieving record underlying net income (up 15%) and strong protection sales, while SLC Management's fee-related earnings surged 37% on strong capital raising.
• The U.S. Dental business faces near-term challenges from Medicaid repricing delays and elevated loss ratios, leading to a revised 2025 earnings outlook, though management remains confident in long-term recovery by 2026.
• SLFIF maintains a strong capital position with a LICAT ratio of 151% and active share buyback program, complemented by an ongoing enterprise-wide restructuring targeting C$200 million in pre-tax savings by 2026.
• Technological differentiation, particularly through GenAI tools and digital platforms, is a core strategic imperative, enhancing client experience, streamlining operations, and driving productivity across segments.

A Global Financial Powerhouse Adapts and Innovates

Sun Life Financial Inc. stands as a leading international financial services organization, providing asset management, wealth, insurance, and health solutions to a diverse client base across Canada, the United States, the United Kingdom, Ireland, Hong Kong, the Philippines, Japan, Indonesia, India, China, Australia, Singapore, Vietnam, Malaysia, and Bermuda. The company's strategic journey has been marked by a consistent focus on high-growth areas and client-centric solutions, underpinned by a history of strategic acquisitions and continuous innovation. For instance, the acquisition of an initial majority stake in InfraRed Capital Partners in 2020 expanded SLC Management's alternative investment offerings, while the 2022 acquisition of DentaQuest significantly bolstered its U.S. dental benefits presence.

SLFIF's overarching strategy, known as the Client Impact Strategy, is built on four strategic imperatives: leveraging asset management capabilities, accelerating momentum in Asia, deepening impact along the client health journey, and operating as a digital company. This framework guides its efforts to achieve lifetime financial security and healthier lives for clients. The company's commitment to these imperatives is evident in its product development, such as the launch of "MyRetirement Income" in Canada in Q3 2023, offering retirees a reliable income source with flexibility.

Technological Differentiation and Operational Excellence

Technology is a cornerstone of Sun Life's strategy, serving as a critical differentiator and a driver of operational efficiency. The company is actively deploying innovative Generative AI (GenAI) tools across its four pillars, aiming to enhance client experience, decrease claims processing times, and achieve productivity savings. This commitment to digital leadership is not merely aspirational but is yielding tangible benefits.

In Canada, the launch of a reimagined mobile application in Q2 2025 provides an enhanced health, wealth, and protection experience, simplifying access to services and key tasks. The "Adviser Notes Assistant," a GenAI tool, was also introduced to streamline advisor workflows and improve client interactions. Asia has seen significant strides in digital adoption, with Aditya Birla Sun Life Insurance Company Limited in India achieving a 100% digital adoption rate for new business, enabling the onboarding of over 100,000 new clients since Q2 2024 through a streamlined digital-first process. Similarly, in the Philippines, a new automated underwriting platform has resulted in a 50% increase in straight-through processing, significantly speeding up the sales cycle and enhancing client experience. In Hong Kong, the company piloted "Adviser Buddy," an AI chatbot designed to support advisors throughout the sales journey. These initiatives collectively contribute to a stronger competitive moat by improving efficiency, reducing operational costs, and delivering a superior, faster client experience, thereby supporting higher margins and market positioning.

Competitive Landscape and Strategic Positioning

Sun Life operates in a highly competitive global financial services market, contending with diversified firms such as Manulife Financial (MFC), Great-West Lifeco (GWO), Prudential Financial (PRU), and AIG (AIG). Sun Life's competitive advantages are rooted in its strong brand recognition, extensive distribution channels, and deep regulatory expertise. Its established presence and customer loyalty, particularly in Canada, provide a stable revenue base and pricing power. For example, in the U.S. medical stop-loss market, Sun Life's "pricing discipline" has positioned it more favorably than some competitors who are now facing "epic rate increases" to correct their books of business.

However, Sun Life also faces vulnerabilities, including a relatively more limited international scale compared to global giants like Manulife and a historical reliance on traditional distribution channels. This exposes it to threats from competitors with more aggressive global expansion strategies or advanced digital capabilities. To counter this, Sun Life is strategically emphasizing growth in its commercial dental business in the U.S. and pivoting to more asset management in its MPF business in Asia. The company's technological advancements, such as GenAI-powered tools and automated underwriting, are crucial in addressing these vulnerabilities by enhancing efficiency and expanding digital reach, thereby improving its competitive standing against tech-savvy rivals and fintech disruptors.

Financial Performance and Segment Dynamics

Sun Life delivered a strong financial performance in Q2 2025, underscoring the effectiveness of its diversified strategy. The company reported underlying net income of C$1,015 million, a 2% increase from Q2 2024, and underlying diluted EPS of C$1.79, up 4%. The underlying return on equity (ROE) stood at a healthy 17.6%, aligning with its medium-term financial objectives. Total assets under management (AUM) reached C$1,541 billion, a 5% increase from Q2 2024. The reported net income of C$716 million, up 11% year-over-year, was impacted by market-related factors and a C$61 million impairment charge on a U.S. group dental contract intangible asset.

Asset Management: This segment, comprising MFS and SLC Management, is a significant contributor. MFS, despite experiencing net outflows of US$14.3 billion in Q2 2025 due to institutional rebalancing and retail uncertainty, demonstrated resilience with US$1.6 billion in fixed income net inflows (up 60%) and was named Best New ETF Issuer at the 2025 etf.com Awards. Its underlying net income was US$184 million, down 5%, with a pre-tax net operating margin of 35.1%. SLC Management, a leader in alternative asset classes, saw its underlying net income rise 7% to C$45 million, driven by a 37% increase in fee-related earnings to C$89 million. It achieved strong capital raising of C$6 billion and net inflows of C$4.1 billion in Q2 2025.

Canada: The Canadian segment's underlying net income decreased 6% to C$379 million in Q2 2025, primarily due to lower investment results and less favorable insurance experience. However, its Group - Health Protection sales surged 41% to C$201 million, driven by large case wins. The company also marked the one-year anniversary of administering the Canadian Dental Care Plan (CDCP), supporting 5.2 million Canadians.

U.S.: U.S. underlying net income was C$195 million (US$143 million), down 4% year-over-year. The Group - Health Protection business saw a 10% increase in underlying earnings, benefiting from improved dental results due to Medicaid repricing and management actions. However, the U.S. Dental business faces significant headwinds from increased per-member utilization and severity in Medicaid claims, coupled with delays in repricing due to uncertainty around Medicaid funding. This has led management to revise its 2025 earnings outlook for the dental business, no longer expecting to achieve US$100 million in earnings this year. Individual - Protection earnings in the U.S. declined 46% due to unfavorable mortality and credit experience.

Asia: Asia was a standout performer, achieving a record underlying net income of C$206 million, up 15% year-over-year. This was fueled by strong individual protection sales (up 24% to C$727 million) across Hong Kong, Indonesia, and India, and a 15% increase in bancassurance sales. Asset Management and Wealth earnings in Asia surged 67% to C$30 million, driven by strong AUM growth. New business Contractual Service Margin (CSM) in Asia increased 34% to C$299 million, contributing to a 23% year-over-year growth in total Asia CSM to C$6.2 billion. The company's increased ownership in Bowtie Life Insurance Company Limited in July 2025 further strengthens its position in Hong Kong's virtual insurer market.

Corporate: The Corporate segment reported a reduced underlying net loss of C$65 million, a 29% decrease from the prior year, primarily due to timing of strategic investment spend and lower incentive compensation.

Capital Strength and Shareholder Returns

Sun Life maintains a robust capital position, providing financial flexibility for strategic investments and shareholder returns. The company's Life Insurance Capital Adequacy Test (LICAT) ratio stood at 151% in Q2 2025, a 2-point increase from the prior quarter, well above regulatory minimums. Organic capital generation, a new disclosure, was strong at C$673 million in Q2 2025, significantly exceeding the medium-term target range of 20% to 30% of underlying net income (net of dividends).

This strong capital generation supports the company's commitment to returning value to shareholders, as evidenced by the repurchase of approximately C$400 million of shares in Q2 2025 and the early renewal of its normal course issuer bid.

Outlook, Risks, and Strategic Resilience

Sun Life's management remains confident in achieving its medium-term financial objectives, including an 8% to 10% underlying EPS growth and a 17% to 18% underlying ROE. This confidence is grounded in the diversified business mix, strategic execution, and ongoing digital transformation.

However, specific risks and challenges warrant attention. The U.S. Dental business faces a reforecasting of its earnings trajectory, with management now expecting it to take "through 2026 to get the rates back to full expected margins" due to persistent Medicaid funding uncertainties and higher utilization. In the stop-loss business, while Q2 2025 results were in line with expectations, the Q4 2024 period saw an "effective trend for large claims" of approximately 16%, driven by factors like advanced cancer cases, premature births, and rising hospital prices. Management is implementing an additional 2% price increase to address these trends. The Vietnam bancassurance business, which saw an impairment charge in Q4 2024 due to "inappropriate selling practices" and a 60% decline in market sales over two years, is showing signs of re-emerging growth. Furthermore, MFS continues to contend with "institutional rebalancing from equity to fixed income" and "elevated retail redemption rates," though a return to positive flows is anticipated in the medium to long term as market conditions normalize.

To mitigate these risks and drive future growth, Sun Life is executing an enterprise-wide restructuring program targeting over C$200 million in pre-tax cost efficiencies by 2026, with 66% already delivered by Q2 2025. These savings will predominantly flow through earnings, with a portion reinvested in digital and AI initiatives. The company is also taking actions to mitigate tax volatility related to foreign currency assets, which impacted Q4 2024 reported net income.

Conclusion

Sun Life Financial Inc. demonstrates a compelling investment thesis rooted in its diversified business model, strategic focus on high-growth areas, and unwavering commitment to digital innovation. Despite near-term headwinds in its U.S. Dental segment and ongoing market-related impacts, the company's strong underlying financial performance, particularly the record results in Asia and the robust growth of SLC Management, underscores its resilience. With a solid capital base, a disciplined approach to expense management, and a clear technological roadmap, Sun Life is well-positioned to achieve its medium-term objectives. The strategic emphasis on leveraging its asset management capabilities, expanding in fast-growing Asian markets, and enhancing client health journeys through digital solutions provides a clear path for sustained profitability and long-term value creation for shareholders.