DBRS Confirms Ratings of Sun Life Financial Inc. and Affiliates

DBRS Limited (DBRS) 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 Preferred Shares rating at Pfd-2. DBRS 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 confirmed Sun Life Capital Trust’s SLEECS Series B rating and Sun Life Capital Trust II’s SLEECS Series 2009-1 rating at “A.” All trends are Stable.

In confirming these 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. Earnings are well-diversified as the Company operates through a four-pillar strategy, where it aims to become a market leader in the segments that it operates in, namely Canada, the United States and Asia and Asset Management. The Company is a market leader in Canada in all the segments it operates in, including group and individual insurance, as well as wealth and asset management. The Company is effectively employing a client-centric strategy, using digital technology to increase client engagement and satisfaction. In the United States, SLF has good market presence in various segments of the group insurance market, along with good market share, offering life insurance solutions to high-net worth international clients. The Company’s major U.S. asset management subsidiary, Massachusetts Financial Services (MFS), has sizable assets under management ($591 billion at Q3 2017) and demonstrated good fund performance and stable fee income, even as net sales remain negative in the current challenging operating environment for mutual fund managers. SLF is strengthening its distribution channels in Asia, where it operates in seven countries, providing life insurance and wealth management solutions. The Company has demonstrated good growth in insurance and wealth sales in Asia. This geographical segment presents an opportunity for higher growth and potentially significant product sales, especially considering the mature and well-saturated insurance markets of North America.

The business model is well-diversified. Recent acquisitions, including Bentall Kennedy (a real estate asset management firm) in 2015 and Assurant, Inc.’s group benefits business in the United States in 2016, are in line with the Company’s focus on pursuing higher-growth, lower-risk opportunities. In recent years, SLF has increased its ownership positions in its Asian insurance operations and strengthened its distribution capabilities in Asia. The Company’s comprehensive and well-developed enterprise risk management framework guides strategic decision making, with SLF aiming to deploy its excess capital in areas that are aligned with its strategy of growing business lines, which are generally less capital intensive and less exposed to market risk. 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 life insurance business in the United States.

As indicated by its leverage ratio of 22.5% (Q3 2017) and Sun Life Assurance’s minimum continuing capital and surplus requirements (MCCSR) ratio of 232% (Q3 2017), the Company has good capitalization and asset quality. The Company’s fixed-charge coverage ratio improved to 10.5 times at 9M 2017, as earnings remain more stable than they have in the past. SLF demonstrated a good overall return on equity (ROE) value of 13.0% for 9M 2017, in line with its stated ROE target of 12% to 14% in the medium term. The Company’s well-diversified operations allow for stability in earnings, even as some businesses may face challenges (for example, the Company’s U.S. runoff life insurance block-experiencing adverse policyholder experience in 2017).

SLF has a conservative invested assets profile, even as its exposure to BBB and lower-rated bonds and corporate loans (29.4% at Q3 2017) is higher than peers. The Company has sizable cash reserves (approximately $1.5 billion at Q3 2017) at the holding company level, providing an additional cushion in an adverse event scenario. 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 the Life Insurance Capital Adequacy Test in 2018. The Company’s hedging programs help to mitigate any volatility in earnings and regulatory ratios that may arise from adverse movements in equity markets or interest rates.

The Stable trend considers the Company’s resilient fundamentals and its ability to adapt to the current challenging economic environment.

RATING DRIVERS
Negative rating pressure could arise if the Company experiences persistent weakness in the Canadian business and profits, sustained adverse reserve development caused by poor experience relative to assumptions, or reduced free cash flow from MFS, and a weakened outlook. A significant increase in financial leverage or a deterioration in asset quality could also place negative pressure on the rating. Positive rating pressure could arise if SLF demonstrates continued benefits from its client-centric strategy and makes significant progress in achieving its strategic goals with its international expansion, combined with solid earnings performance and growth, consistently improved financial metrics, asset quality and income stability across all of 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 on the issuer page at www.dbrs.com.

The applicable methodologies are Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (December 2016) and DBRS Criteria: Preferred Share and Hybrid Security Criteria for Corporate Issuers (December 2017), which can be found on our website under Methodologies.

Lead Analyst: Stewart McIlwraith, Senior Vice President, Head of Insurance – Global FIG
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer – Global FIG and Sovereign Ratings

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

For more information on this credit or on this industry, visit www.dbrs.com.