DBRS Confirms Ratings on Sun Life Financial Inc. and Affiliates

DBRS has today confirmed the ratings for Sun Life Financial Inc. (Sun Life or the Company) and its affiliates. The Claims Paying Ability rating of IC-1 assigned to Sun Life Assurance Company of Canada has also been confirmed. All ratings have a Stable trend.

The Company continues to have a strong earnings platform in Canada, where it has obtained high market share rankings in a number of major product categories, including group benefits and group retirement savings products. The Canadian operations have achieved meaningful scale and leadership positions in all of their chosen markets, representing close to one-half of the Company’s net income for continuing operations. The Asian operations continue to grow with the emerging middle class market and represent a good source of future earnings growth. The strategic decision to exit U.S. annuity and certain U.S. life businesses and their attendant risks, and put the remaining U.S. life businesses in runoff was prudent given a Canadian company’s competitive disadvantage with respect to accounting and expected regulatory frameworks for these products. Sun Life has shifted its U.S. growth focus in favour of products requiring lower capital and more predictable earnings, such as mutual funds and group benefits. Nevertheless, the Company’s decision to exit two major product lines reduces its market presence in the United States, as it adopts a niche strategy in the world’s largest insurance market. However, the wealth management franchise at MFS Investment Management (MFS) continues to be a steady contributor to earnings as MFS successfully grows its assets under management through strong investment performance.

The strength of Sun Life’s Canadian operations and MFS franchise, a growing appetite for its products and services, a reasonable level of diversification in attractive market niches in Asia and international business, conservative risk management, and its 2015 earnings target of $1.85 billion with a return on equity of between 12% and 13% are all supportive for the rating.

Sun Life’s risk management platform, while extensive and established, has mitigated much of the market sensitivity for earnings. Future market events will be watched to see if the Company is able to execute its risk mitigation programs within its declared sensitivities. The financial leverage ratio of debt plus preferred shares relative to total capitalization has improved to 28.2% as at September 30, 2013. A ratio less than 25% would be favourable for the rating. Also, a return to profitability levels that generate fixed charge coverage ratios of at least seven times on a total company basis is anticipated and within reach for the Company.

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 by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodology is Rating Companies in the Canadian Life Insurance Industry (January 2013), which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.