DBRS Morningstar Confirms Sun Life Financial Inc. at A (high) and Sun Life Assurance Company of Canada at AA, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings of Sun Life Financial Inc. (SLF or the Company) and its related entities, including SLF’s Issuer Rating at A (high) and the Financial Strength Rating of Sun Life Assurance Company of Canada (SLA) at AA. The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS
The ratings and Stable trends reflect SLF’s well-established global franchise, across Canada, the U.S., and multiple countries in Asia, underpinned by significant market shares in many of its business lines. The Company has demonstrated consistent profitability in recent years, with earnings benefitting from the Company’s diversified business model, and good expense and claims management. SLF has a strong risk management profile, very strong liquidity, good product diversification, and an expanding footprint in the Asian life insurance market and in wealth management globally. The Company maintains appropriate regulatory capital levels and has relatively low leverage compared with peers, enhancing its financial flexibility. SLF’s ratings also consider the complexities of operating a global insurance organization with an increasing exposure to emerging markets.

RATING DRIVERS
The ratings for SLF and SLA are well placed in their current rating categories. Over the longer term, DBRS Morningstar would upgrade the ratings if the Company improves overall profitability, together with the successful integration of DentaQuest, while strengthening capitalization buffers and maintaining a similar risk profile.

Conversely, DBRS Morningstar would downgrade the ratings if the Canadian business, a strong contributor to overall results, were to report a persistent decline in earnings and a weakened franchise. A sustained material decline in regulatory capital levels combined with a deterioration in financial leverage would also result in a downgrade.

RATING RATIONALE
The Company is one of the three biggest life insurers in Canada. SLF is also a market leader in the Philippines and in the Hong Kong Mandatory Provident Fund market and a top 10 player in most of the other Asian countries where it operates in. Additionally, the Company has a strong presence in the U.S. group benefits market where it is a leading independent stop-loss insurance provider and a strong competitor in group life and disability insurance. SLF's presence in the U.S. has been further strengthened by the acquisition of DentaQuest, a leader in dental benefits in the U.S. market. Overall, SLF has strong global brand recognition, a well-diversified business model both by geography and product, all supported by the Company's extensive product distribution capacity.

The Company's ratings benefit from SLF's comprehensive and well-developed risk management framework that encompasses its diverse businesses, operations in multiple countries, and investment risk categories that ensure its risk exposures are well understood and mitigated. Additionally, SLF’s extensive hedging programs help to mitigate most of the volatility in earnings and regulatory ratios that may arise from adverse movements in equity markets or interest rates. Positively, over the past few years, the Company has strengthened its risk management practices, shifted toward a lower-risk product portfolio, exited unprofitable or capital-intensive businesses, and reduced its market and credit risk exposures.

DBRS Morningstar believes the Company has strong earnings ability from its multiple business segments. SLF's continued progress on its four-pillar enterprise strategy has further diversified earnings, positioning the Company well for future growth, as well as strengthening earnings stability. SLF's asset management segment is an important component in diversifying the Company’s earnings in noninsurance businesses, typically generating about 30% of common shareholders' net income. DBRS Morningstar expects the asset management segment and the Canadian operations to remain the large profit contributors in the near term, providing considerable earnings stability. Meanwhile, the contributions from SLF Asia and the U.S. businesses to common shareholders’ net income have been growing, even with some manageable volatility in recent years. Overall, the Company generates a good return on equity, with a 2021 three-year weighted average of 14.3% (as calculated by DBRS Morningstar), which compares favourably with peers.

DBRS Morningstar also believes SLF has very strong liquidity. The Company's liquidity profile is supported by its investment portfolio that comprises a high proportion of marketable bonds and equities. The Company has sufficient resources to pay its near-term debt maturities without relying on raising additional debt to do so. Positively, the Company has only a limited proportion of more risky nonliquid assets in its investment portfolio, which is dominated by investment-grade bonds.

SLF’s capitalization level supports the Company’s ratings and Stable trends. The Company and its main operating insurance subsidiary, SLA, have maintained appropriate regulatory capital ratios. With sizable cushions over regulatory minimums under the Life Insurance Capital Adequacy Test (LICAT) framework, SLF is well positioned to navigate adverse scenarios. As of H1 2022, SLA's LICAT was 124%, and the LICAT ratio for the consolidated holding company was appropriate at 128%. The Company's foreign subsidiaries also meet local regulatory capital rules of the jurisdiction where they operate.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

The Grid Summary Grades for SLF are as follows: Franchise Strength – Very Strong/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 Insurance Companies and Insurance Organizations https://www.dbrsmorningstar.com/research/402220/ (August 31, 2022). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings, https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022) in its consideration of ESG factors.

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577