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Sun Life Declines 30% YTD: Will High Costs Hurt the Stock?

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Sun Life Financial Inc. (SLF - Free Report) is being adversely impacted by high debt levels, leading to an increase in interest expenses as well as escalating costs, which, in turn, are putting a strain on margin expansion.

Shares of this Zacks Rank #3 (Hold) life insurer have lost 29.7% on a year-to-date basis compared with the industry’s decline of 37.5%. The Zacks Consensus Estimate for the company was revised 8.1% downward over the last 30 days for current-quarter earnings.

 

 

Will High Costs and Lower Rates Continue to Hurt the Stock Price?

The life insurer continues to suffer from commission expenses, operating expenses and premium taxes. This resulted in the company’s total benefits and expenses reporting a rise of 55.2% year over year in 2019. Increased costs are likely to pressurize margin expansion, going forward.

Moreover, Sun Life seems to be burdened with high debt levels, which induces rise in interest expenses. Total debt securities rose 9.6% year over year in 2019, with interest expenses increasing 9.2% year over year in the same time frame. The life insurer’s interest coverage ratio of 10.7% compares unfavorably with the industry average of 17.9%, which also raises the financial risk. Its debt-to-equity ratio of 18.1% compares unfavorably with the industry’s 13.2%.

The interest rate cut by the Federal Reserve in the United States following the coronavirus outbreak has also dealt a blow. The rates have been slashed to 0-0.25% for stimulating the sluggish U.S. economy. Also considering the present economic uncertainty, Bank of Canada has lowered interest rates to 0.25% in March. Such resortment to lower interest rates comes as disappointing news for most life insurance companies, having operations in both the United States and Canada. Sun Life, being a Canada-based life insurer, also offers group benefit policies across the United States.

Lower interest rates often make life insurance products unattractive and result in lower premium generation. As a result, revenues of most life insurance companies are expected to suffer from the rate cut. The Zacks Consensus Estimate for Sun Life’s 2020 revenues is pegged at $27.9 billion, indicating a decline of 6.6% from the year-ago reported figure.

Contributing to the company’s top-line growth as well, net investment income surged 450% year over year in 2019. However, the current low interest rate environment in the United Statesand Canadais likely to keep investment yields under pressure, which would consequently weigh on its overall investment income.

Additionally, Sun Life’s trailing 12-month return on equity (ROE) of 13.6% is lower than the industry’s 15.1%. This reflects the company’s inability to utilize its shareholders’ funds.

We believe that such potential headwinds are likely to dent the company’s growth prospects, going forward.

Stocks to Consider

Some better-ranked stocks in the same space are American Equity Investment Life Holding Company (AEL - Free Report) , Primerica, Inc. (PRI - Free Report) , and FGL Holdings . While American Equity Investment currently sports a Zacks Rank #1 (Strong Buy), Primerica and FGL Holdings carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

While American Equity Investment and Primerica surpassed earnings estimates in each of the trailing four quarters by 53.4% and 3.7%, respectively, FGL Holdings outpaced earnings estimates in three of the trailing four quarters by 15.7%.

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