DBRS Confirms Ratings on Sun Life Financial Inc. and Affiliates

DBRS Limited (DBRS) has today confirmed Sun Life Financial Inc.’s (SLF or the Company) Issuer Rating and Senior Unsecured Debentures rating at “A” as well as its Subordinated Unsecured Debentures rating at A (low) and its Preferred Shares rating at Pfd-2. DBRS has also confirmed Sun Life Assurance Company of Canada’s (Sun Life Assurance) Financial Strength Rating and Issuer Rating at AA (low) as well as its Subordinated Debt rating at A (high). At the same time, DBRS has confirmed the SLEECS Series B rating of Sun Life Capital Trust and the SLEECS Series 2009-1 rating of Sun Life Capital Trust II at “A.” All trends are Stable.

In confirming the ratings, DBRS considered the Company’s excellent franchise, which reflects its position among the top three insurance and financial services companies in Canada. SLF has extensive insurance and wealth management operations in Canada, the United States and multiple countries in Asia. The business model is well diversified and recent acquisitions, including those of Bentall Kennedy (a real estate asset management firm) and Assurant Inc.’s group benefits business in the United States are in line with the Company’s focus on pursuing higher-growth, lower-risk opportunities. SLF also increased its ownership positions in its Asian insurance operations and strengthened its distribution capabilities in Asia, a high-growth potential market. The Company’s efforts to de-risk its portfolio is viewed positively by DBRS; however, DBRS is cognizant of the fact that risks pertaining to large blocks of legacy businesses remain on the Company’s balance sheet as a result of its runoff blocks of annuity business in the United Kingdom and life insurance business in the United States.

As indicated by its leverage ratio of 25.6% (Q3 2016) and Sun Life Assurance’s minimum continuing capital and surplus requirement (MCCSR) of 221% (Q3 2016), the Company has good capitalization and asset quality, although its exposure to BBB and lower-rated bonds and corporate loans (33.6% at YE2015) is higher than peers. SLF’s asset management subsidiary, Massachusetts Financial Services (MFS), is facing challenges from continuing net negative sales, despite good fund performance and stable fee income.

The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to the current challenging economic environment. High capital levels place SLF in a good position to deal with changes in the regulatory environment, including the replacement of the current MCCSR guideline by Life Insurance Capital Adequacy Test in 2018.

RATING DRIVERS
Negative rating pressure could arise if (1) the Company incurs a significant increase in financial leverage or a deterioration in asset quality, (2) there is persistent weakness in the Canadian business and profits or (3) there is sustained adverse reserve development caused by poor experience relative to assumptions. Positive rating pressure could arise if the SLF experiences solid earnings performance and growth or if it displays consistently improved financial metrics and asset quality, coupled with income stability across its various business lines.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2015) and DBRS Criteria: Preferred Share and Hybrid Criteria for Corporate Issuers (January 2016), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith
Rating Committee Chair: Roger Lister

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.