Fitch Ratings has affirmed the ratings of Sun Life Financial Inc. (TSE,
NYSE: SLF) including all outstanding issues, as well as the Insurer
Financial Strength (IFS) ratings of SLF's primary Canadian insurance
subsidiaries at 'AA-'. The Rating Outlook is Negative. The 'A-' IFS
ratings of SLF's U.S. life insurance subsidiaries remain on Rating Watch
Negative. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The Negative Outlook reflects the historical volatility in SLF's
earnings and the possibility it may continue at run-rate operating
earnings and debt service that is not supportive of the current rating
level.
Fitch believes SLF's ability to improve its run-rate operating earnings
will depend in part on how the company deploys the proceeds from the
pending sale of Sun Life Assurance Company of Canada (U.S.) and Sun Life
Insurance & Annuity Co. of New York to Delaware Life Holdings, a company
owned by shareholders of Guggenheim Partners. The two Sun Life companies
contain SLF's U.S. variable annuity (VA) and certain life insurance
businesses which have in recent history been a drag on overall earnings
and a significant consumer of capital. The sale has been delayed due to
regulatory review but Fitch expects it will be successfully completed.
Fitch's expectation is that a significant portion will be used by SLF to
fund acquisitions to grow its U.S. employee benefits business, Asian
insurance operations or its investment management business. Currently,
SLF's U.S. employee benefits business and Asian operations are not yet
significant contributors to overall profitability, so well-executed
acquisitions could improve the company's earnings diversification.
However, Fitch's primary concern is that an ill-timed or poorly executed
acquisition would negatively impact operating earnings and debt service
coverage.
SLF's reported operating net income of CAD565 million for the first
three months of 2013 was a decrease of 22% or CAD162 million versus
prior year. The favorable net impact of market factors included in
operating net income of CAD136 million in 2013 was CAD234 million lower
than in the prior year. Absent the net impact of market factors, net
operating income would have increased by 20% year over year. Full-year
2012 operating net income was CAD1.7 billion, including the favorable
net impact of approximately CAD79 million in market factors. While SLF
has taken a number of steps to improve profitability including
increasing its interest rate hedging and exiting certain lines of
business, Fitch believes earnings remain susceptible to continued low
interest rates.
The affirmation of the ratings reflects SLF's strong capitalization,
disciplined investment strategies that have resulted in strong liquidity
and solid asset quality, the company's leading market position in
Canada, growth prospects for emerging Asian markets, and relatively
stable performance in U.S. mutual funds. Offsetting these positives are
the company's higher levels of operating debt issued from the parent
company than many peers, low debt service capacity and sizable common
shareholder dividends.
Financial leverage was 17% at March 31, 2013. Fitch views SLF's debt
service coverage (on a Canadian IFRS earnings basis excluding the impact
of equity markets and interest rates) of approximately 8x during the
first three months of 2013 and 7x and 3x in 2012 and 2011, respectively,
as volatile for the rating level and below historical levels which were
above 9x. However, Fitch believes that under Canadian regulations, SLF
has greater flexibility to upstream dividends from operating
subsidiaries without regulatory approval than do most U.S. peers.
Fitch believes that SLF is well-capitalized on a risk-adjusted basis,
with a minimum continuing capital and surplus requirement (MCCSR) for
Sun Life Assurance Company of Canada of 214% at March 31, 2013. The sale
of the U.S. Variable annuity (VA) and certain life insurance businesses
is not expected to have an impact on MCCSR.
RATING SENSITIVITIES
The IFS ratings of SLF's U.S. life subsidiaries remain on Rating Watch
Negative. Resolution of the Rating Watch will occur following further
discussions with management and completion of the sale, and will likely
result in a downgrade of the IFS ratings by at least one notch. Absent
discussions with Guggenheim Partners, the ratings will be withdrawn.
Assuming no material changes to the credit of the entities involved
Fitch may not comment further until completion of the sale.
The key rating triggers that could result in a downgrade include:
--Failure to complete the sale of the company's run-off U.S. operations;
--A decline in adjusted fixed-charge coverage, excluding equity market
and interest rate impacts below 6x;
--A sustained drop in the company's risk-adjusted capital position with
no plans or ability to rectify; this would include the MCCSR ratio
falling below 200%;
--An increase in financial leverage to over 25%;
--A large acquisition that involves execution and integration risk or
impacts the company's leverage and capitalization.
The key rating triggers that could result in a return to a Stable
Outlook include:
--Completion of the sale of run-off U.S. operations;
--Consistent maintenance of adjusted fixed-charge coverage, excluding
equity market and interest rate impacts, of over 6x.
Fitch has affirmed the following ratings with a Negative Outlook:
Sun Life Financial, Inc.
--Issuer default rating at 'A';
--4.8% senior notes due 2035 at 'A-';
--4.95% senior notes due 2036 at 'A-';
--5.7% senior notes due 2019 at 'A-';
--4.57% senior notes due 2021 at 'A-';
--5.4% subordinated debentures due 2042 at 'BBB+';
--5.59% subordinated debentures due 2023 at 'BBB+';
--7.9% subordinated debentures due 2019 at 'BBB+';
--4.38% subordinated debentures due 2022 at 'BBB+';
--4.75% noncumulative preferred shares, series 1, at 'BBB';
--4.8% noncumulative preferred shares, series 2, at 'BBB';
--4.45% noncumulative preferred shares, series 3, at 'BBB';
--4.45% noncumulative preferred shares, series 4, at 'BBB';
--4.5% noncumulative preferred shares, series 5, at 'BBB';
--6% noncumulative preferred shares, series 6R, at 'BBB;'
--4.35% noncumulative preference shares Series 8R, at 'BBB';
--3.9% noncumulative preference shares Series 10R, at 'BBB'.
--4.25% noncumulative preference shares Series 12R rated 'BBB'.
Sun Life Assurance Co. of Canada
--IFS ratings at 'AA-';
--IDR at 'A+';
--6.30% subordinated notes due 2028 at 'A'.
Sun Life Capital Trust
--Sun Life ExchangEable Capital Securities (SLEECS), 7.093% Series B, at
'A-';
--Sun Life ExchangEable Capital Securities (SLEECS), 5.863% Series
2009-1, at 'A-'.
Sun Canada Financial Company
--7.25% subordinated notes due 2015 at 'A-'.
In addition, the following ratings remain on Rating Watch Negative:
Sun Life Assurance Co. of Canada (U.S.)
Sun Life Insurance & Annuity Co. of NY
--IFS ratings 'A-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', January 2013.
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=698731
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=795357
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