DBRS Comments on Sun Life Sale of U.S. Subsidiary

DBRS Limited (DBRS) has reviewed the announcement made by Sun Life Financial Inc. (SLF or the Company, senior rating of AA (low)) of its decision to sell the Sun Life Assurance Company of Canada U.S. subsidiary (SLA (US)) to Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners, for a base purchase price of US$1.35 billion, as adjusted to reflect the performance of the business through closing. There are no implications for the current ratings at this time, most of which remain Under Review with Negative Implications, where they were placed on September 7, 2012.

SLA (US) houses the Company’s U.S. fixed and variable annuity business, as well as certain institutional life insurance lines including variable life insurance. In total, the business represents between 10% and 15% of the Company’s normalized earnings and a similar percentage of balance sheet assets (between $30 billion and $40 billion). However, the business also accounted for much of the earnings volatility experienced by the Company over the past five years, brought on by deteriorating credit market conditions and equity market volatility.

Since the Company announced its decision in late 2011 to cease writing most of the products housed in SLA (US), DBRS has expected that a review of options such as that announced today was possible, if only to de-risk the Company in the event of further capital market deterioration. Correspondingly, exposure to equity markets following the closing of this sale transaction is estimated by the Company to fall by 50%, and exposure to lower interest rates by 35%. DBRS notes that despite imperfect hedges, the Company had already been given credit for satisfactorily managing these risks.

DBRS believes that the announced sale is incrementally positive for the Company’s longer-term credit rating profile. As the market exposures related to the affected segments are reduced once and for all, Company management can focus on delivering on its four point strategic plan, and holding company liquidity and regulatory capital is temporarily enhanced albeit at the cost of a lower return on invested capital.

In September 2012, following, but not in response to, the Company’s decision to de-risk its U.S. business, DBRS put the ratings of the Company and its affiliates Under Review with Negative Implications. The purpose of this review was to stand back from the specific financial performance of the Company and to put it into context vis-à-vis the ratings of SLF’s peer group and broader developments in the Canadian life insurance industry. DBRS remains concerned about the strategic position of the industry in a difficult economic environment. Over the past year, SLF has become more concentrated on its successful Canadian franchise. Strategic initiatives in Canada could well continue to support the Company’s core profitability. However, DBRS has yet to be convinced that the Company’s earnings projections for other businesses will be achieved in line with SLF’s proposed schedule.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The applicable methodology is Rating Companies in the Canadian Life Insurance Industry, which can be found on our website under Methodologies.