Fitch Affirms Sun Life Financial Inc.'s Ratings; Outlook Revised to Stable

Tue Jan 14, 2014 5:38pm EST

Related Topics

(The following statement was released by the rating agency) CHICAGO, January 14 (Fitch) 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 subsidiary, Sun Life Assurance Co. of Canada (SLAC), at 'AA-'. The Rating Outlook is revised to Stable from Negative. A complete list of ratings follows at the end of this release. KEY RATING DRIVERS The return to a Stable Outlook reflects SLF's improved earnings and operating profile, which has benefited from the company's recent disposition of its underperforming U.S. individual annuity and life insurance businesses. Fitch's expectation is that a significant portion of the proceeds from the disposition will be used by SLF to fund acquisitions to grow its U.S. employee benefits business, Asian insurance operations, or its investment management business. 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, albeit improved, fixed-charge coverage, and sizable common shareholder dividends. Fitch believes that SLF is well-capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) for SLAC of 216% at Sept. 30, 2013. The sale of the U.S. variable annuity and certain life insurance businesses had a small negative impact on SLAC's MCCSR of approximately 4 points. Proceeds from the sale of approximately CAD1.7 billion are held at the holding company and their positive effects are not included in SLAC's MCCSR. The company's strong balance sheet fundamentals also benefit from relatively low financial leverage, which was 16% at Sept. 30, 2013, and is below rating expectations and that of similarly rated peers. SLF's fixed-charge coverage (on a Canadian IFRS earnings basis excluding the net impact of market factors) has improved over the past year but remains below rating expectations. Through the first nine months of 2013, SLF had a fixed-charge coverage ratio of 6.0x compared to 5.4x and 2.7x, respectively, in 2012 and 2011. Fitch expects fixed-charge coverage to remain near this level over the intermediate term but to improve in late 2014 and 2015. However, under Canadian regulations, SLF has greater flexibility to upstream dividends from operating subsidiaries without regulatory approval than do most U.S. peers, which, in Fitch's view, enhances holding company liquidity. SLF's published common shareholders' operating net income from combined operations of CAD1.5 billion for the first nine months of 2013 was an increase of 22% or CAD275 million versus prior year to date. The favorable net impact of market factors included in net operating income from combined operations of CAD330 million in 2013 was CAD284 million higher than in the prior year. Absent the net impact of market factors, net operating income from combined operations would have decreased by 1% year over year. 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 the continued challenge of low interest rates. RATING SENSITIVITIES The key rating triggers that could result in a downgrade include: --A decline in fixed-charge coverage, excluding the net impact of market factors, to 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 equity-adjusted financial leverage to over 20%; --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 an upgrade include: --Consistent maintenance of adjusted fixed-charge coverage, excluding the net impact of market factors, of over 10x; --Stable to improving balance sheet fundamentals. Fitch has affirmed the following ratings. The Outlook is revised to Stable from Negative: 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-'. Contact: Primary Analyst Bruce E. Cox Director +1-312-606-2316 Fitch Ratings, Inc. 70 W. Madison Street Chicago, IL 60602 Secondary Analyst Tana M. Higman Director +1-312-368-3122 Committee Chairperson James Auden Managing Director +1-312-368-3146 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Insurance Rating Methodology', November 2013. Applicable Criteria and Related Research: Insurance Rating Methodology -- Amended here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.