Executives at Toronto-based Sun Life Financial Inc. say a four-pillar strategy that focuses on expanding global funds and Asia operations will boost the insurer’s annual profit to $2 billion by 2015. Although analysts believe the profit target is realistic, they remain skeptical about where the growth will come from, especially with respect to Asia.

As it stands, Sun Life is a long way from reaching its $2-billion target by 2015. In the past year, low interest rates have pummelled returns from the insurer’s investments, hitting the bottom line hard. For the year ended Dec. 31, 2011, the firm’s net operating income fell to $104 million, vs the $1.48 billion it earned in 2010.

In the past 12 months, Sun Life’s stock price has fallen to about $23.60 a share from roughly $30. At the stock’s pre-crisis peak in December 2007, it was trading above $50. However, dividends have remained steady since 2008, at 36¢ a share, and analysts expect them to be maintained.

Low interest rates have forced Sun Life to shut down its variable annuity and individual insurance businesses in the U.S. In December, New York-based Standard & Poor’s Financial Services LLC had put Sun Life on a credit watch “with negative implications.”

Despite these challenges, Dean Connor, president and CEO of Sun Life, hasn’t shied away from setting ambitious targets for the insurer. In addition to the net income target, he says, the firm will deliver 12%-13% return on equity by 2015: “We will reshape the risk profile of Sun Life. We will focus on reducing our volatility and focus on profitability, which will make us the largest insurer in Canada.”

Under Sun Life’s new strategy, its North American operations – Sun Life Canada and Sun Life U.S. – will be restructured to be more cost-efficient and focused on the retirement and group markets. More resources will be devoted to expanding the insurer’s growth divisions – Sun Life Asia and MFS Investment Management, Sun Life’s Boston-based global asset-management arm, which has offices in the U.S., Canada, Brazil, Asia and Britain.

Of Sun Life’s annual profit target for 2015 of $2 billion, Canada represents the biggest piece of that pie.

Canadian markets are projected to supply $900 million in profit, or 45% of the total, by 2015. For the year ended Dec. 31, 2011, the division earned $653 million.

To reach its goal, the Canadian division will aggressively target the retirement market, Kevin Dougherty, president of Waterloo, Ont.-based Sun Life Financial (Canada) Inc., says: “Millions of people are going to need retirement funds. And our large distribution channel through our sales force puts us in the best position to go after this market.”

Sun Life Canada plans to ramp up recruitment of new advisors and expand its dual-licensed career advisor sales force to 2,600 agents from 2,208 in 2011.

But analysts suggest that if the insurer wants to go after the retirement market, the firm also must expand its fund offerings via Sun Life Global Investments (Canada) Inc., its Toronto-based mutual fund company.

“Within the domestic landscape,” says John Aiken, vice president, global research, Canadian financials, in Toronto, with Barclays Capital, a division of London-based Barclays Bank PLC, “there is definitely a push for Sun Life to grow its assets under management, as well as persuade its advisors to sell more mutual funds.”

Unlike segregated fund products, which have capital requirements to back their investment guarantees, mutual funds do not have such guarantees and no capital requirements, and thus are more profitable.

Sun Life executives set a 2015 target for SLGI Canada’s mutual fund sales of $2.4 billion, up from the $506 million in AUM in 2011.

Although Canada represents the largest piece of Sun Life’s 2015 profit target, management indicates that Asia and MFS will play a much larger role in the parent insurer’s profitability in the future.

Connor expects Asia to contribute up to $250 million of operating income by 2015 and reach a compound annual revenue growth rate of 23%. In 2011, Asia brought in $144 million in net operating income. Currently, Asia makes up about 5% of Sun Life’s total sales revenue.

The bulk of the Asian division’s growth will come from expanding distribution channels in India and the Philippines, which were once “negative investments,” says Connor: “We have a fairly sizable book of ‘in force’ business [in those regions]. As you swing from a loss to an income, [the bottom line] ramps up pretty quickly.”

Sun Life will focus on the distribution of Philippines-based Sun Life Grepa Financial Inc.’s products through a partnership with Rizal Commercial Banking Corp., a Philippines-based bank.

Although Asia represents a large growth opportunity – particularly for savings and protection products, such as term life insurance and GICs – analysts remain skeptical. “For Asia to make up 25% of revenue is a bit of a [stretch],” says Aiken. A more likely scenario, he adds, is that Sun Life Asia achieves the $250-million profit target by 2022, not 2015.

The growth of MFS is much more critical to the parent insurer’s future growth, Aiken says. Of the $2-billion profit target, MFS is expected to make up $380 million (19%), whereas Asia comprises only 12.5% of Sun Life’s goal. MFS brought in $270 million in profit for 2011. MFS could contribute more to Sun Life’s growth if the former firm can fully leverage its recent acquisition of McLean Budden Ltd., a Toronto-based asset-management firm, says Peter Routledge, analyst with Montreal-based National Bank Financial Ltd. “With McLean Budden under its wing,” he says, “[MFS] has the means to distribute its funds to a large retail advisory force.”

MFS will launch new products in fixed-income and equities categories that focus on global credit investments, as well as region-specific and emerging-markets funds. A rebranding will create more international clout, says Robert Manning, CEO of MFS: “We want to transform the brand for a marketplace that is truly global.”

Sun Life also is planning to restructure its non-MFS U.S. operations, which had incurred a number of one-time losses last year after exiting the variable annuity and individual life insurance markets, leaving the division with a loss of $786 million.

By focusing on the group insurance market in the U.S., Sun Life is aiming for the U.S. division to earn $525 million in 2015.

The goal is for Sun Life U.S. to become one of the top five providers of voluntary benefits in the U.S. The division now ranks ninth in sales for group disability and life products.

Adding new products to the U.S. division’s group benefits shelf, says Wes Thompson, president of Sun Life U.S., as well as improving its sales distribution, will be critical to that goal. “We have been working,” he says, “on expanding our distribution sales force on the group side for the past two years.”

Although analysts are confident that the insurer will deliver on its U.S. division’s targets, some say it’s a long road ahead.

In a recent note, Doug Young, analyst with Toronto-based TD Securities Inc., the capital markets division of Toronto-Dominion Bank, states: “The transition of the U.S. insurance business has just started. The closure of [the U.S. lines of business] should positively affect earnings near term; but as the businesses run off, expenses need to be tightly managed or other options pursued to move these businesses off its books.”

© 2012 Investment Executive. All rights reserved.