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

DBRS Limited (Morningstar DBRS) confirmed all credit 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 credit ratings are Stable.

KEY CREDIT RATING CONSIDERATIONS
The credit ratings and Stable trends reflect the Company'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 and excellent product and geographic diversification. The Company has an expanding footprint in the Asian life insurance market and in wealth management globally. SLF has demonstrated consistent profitability in recent years, with earnings benefitting from the Company's diversified business model as well as good expense and claims management processes. The Company has a solid risk management framework, as well as a high-quality invested assets portfolio mix. SLF has very strong liquidity profile including a significant amount of cash at the holding company level. SLF maintains appropriate regulatory capital levels and has manageable leverage. The Company's credit ratings also consider the complexities of operating a global insurance organization with an increasing exposure to emerging markets which may affect operational risk.

CREDIT RATING DRIVERS
Over the longer term, Morningstar DBRS could upgrade the credit ratings if the Company achieves sustained profitability and capitalization metrics that are consistent with a higher credit rating category while materially reducing its investment portfolio credit risk exposure.

The credit ratings would be downgraded if there were sustained and significant deterioration in the Company's risk profile or profitability combined with a material decline in capitalization buffers.

CREDIT RATING RATIONALE

Franchise Strength Building Block Assessment: Very Strong/Strong
SLF benefits from its strong global brand recognition, a well-diversified business model both by geography and by product, and extensive product distribution capacity. SLF is one of Canada's top three life insurers, a market leader in the Philippines and in the Hong Kong Mandatory Provident Fund market. The Company is also a top 10 player in most of the other Asian countries that it operates in. Additionally, SLF 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. The Company's presence in the U.S. has been further strengthened by the completion of the Company's acquisition and integration of DentaQuest, a leader in the U.S. dental benefits market.

Earnings Ability Building Block Assessment: Strong
Morningstar DBRS views SLF as having a strong earnings ability generated from its multiple business segments. The Company's continued focus on its four-strategic pillars strategy (Asset Management, Canada, U.S., and Asia) has increased the diversity of earnings, positioning SLF well for future growth in these four key segments while maintaining resilient earnings. The asset management segment and the Canadian operations are expected to remain the larger 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 consistently positive.

Risk Profile Building Block Assessment: Strong/Good
SLF's credit ratings are supported by the Company's comprehensive and well-developed risk management framework that ensures risk exposures are well understood and managed. Additionally, the Company'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, SLF has shifted toward a lower-risk product portfolio and exited unprofitable or capital-intensive businesses. SLF has a sizable amount of mortgages and loans on its balance sheet, which exposes it to credit, and liquidity risk; however, most of these investments are rated investment grade, with low loan-to-value ratios. A significant portion of SLF's mortgage portfolio is insured by the Canada Mortgage and Housing Corporation which mitigates the Company's credit risk exposure.

Liquidity Building Block Assessment: Very Strong
The Company's claims payment profile is relatively predictable, with a very low probability of claims arising to a level that would cause a liquidity problem. SLF's liquidity profile is supported by the significant amount of cash, cash equivalents, and short-term securities on its balance sheet and an investment portfolio that comprises a high proportion of highly liquid bonds and equities. Indeed, about 20% of its bond portfolio was rated AAA with only about 1% rated non-investment grade as at H1 2024.

Capitalization Building Block Assessment: Strong/Good
SLF and its main operating insurance subsidiary, SLA, have consistently maintained strong regulatory capital ratios, with sizable buffers over regulatory targets under the Life Insurance Capital Adequacy Test (LICAT) framework. Morningstar DBRS views SLF's capitalization as being very well positioned to navigate adverse scenarios. As of June 30, 2024, SLA's LICAT was 142%, and the LICAT ratio for the consolidated holding company was even higher, at 150%. Solid earnings in the last five years have contributed to SLF's capital generation, supporting the Company's credit ratings and Stable trends.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781.

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (September 10, 2024) https://dbrs.morningstar.com/research/439195. In addition Morningstar DBRS uses the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024) https://dbrs.morningstar.com/research/437781 in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

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 dbrs.morningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

For more information on this credit or on this industry, visit dbrs.morningstar.com.

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