DBRS Morningstar Finalizes Provisional Rating of A (low), Stable Trend, on Sun Life Financial Inc.’s Limited Recourse Capital Notes

DBRS Limited (DBRS Morningstar) finalized its provisional rating of A (low) with a Stable trend on Sun Life Financial Inc.’s (SLF or the Company) Limited Recourse Capital Notes Series 2021-1 (Subordinated Indebtedness). DBRS Morningstar assigned the rating equal to the Company’s Issuer Rating of A (high) less two rating notches, which is consistent with DBRS Morningstar’s notching approach for capital instruments issued by insurance holding companies. This is one notch below the rating of SLF’s Subordinated Unsecured Debentures.

SLF expects to issue $1 billion of the Limited Recourse Capital Notes on June 30, 2021, with a maturity date of June 30, 2081. The Capital Notes will have an initial five-year fixed rate of 3.60%.

RATING DRIVERS
Given the already high rating level and uncertain macroeconomic environment, a ratings upgrade is unlikely in the near term. In the longer term, an upgrade could arise from continued progress with SLF's business diversification strategy while maintaining a conservative risk profile, as well as from an improvement in asset quality, including having a larger proportion of higher-rated bonds (rated “A” or higher) in its investment portfolio.

The ratings would be downgraded if the Canadian business, a strong contributor to overall results, were to report a sustained decline in earnings, indicating a weakened franchise. Moreover, a substantial decline in regulatory capital levels or a sustained deterioration in financial leverage over 30% would result in a downgrade.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

The Grid Summary Grades for Sun Life Financial Inc. are as follows: Franchise Strength – Strong; Risk Profile –Strong/Good; Earnings Ability – Strong; Liquidity – Very Strong; Capitalization – Strong.

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

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21, 2020; https://www.dbrsmorningstar.com/research/364260). Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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.dbrsmorningstar.com.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

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

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