A.M. Best Affirms Ratings of Sun Life Financial Inc. and Its Canadian Life Subsidiary; Downgrades U.S. Subsidiaries

OLDWICK, N.J.--(BUSINESS WIRE)--A.M. Best Co. has affirmed the financial strength rating (FSR) of A+ (Superior) and issuer credit rating (ICR) of “aa-” of Sun Life Assurance Company of Canada (Sun Life) and Sun Life and Health Insurance Company (U.S.) (SLHIC) (Windsor, CT). Concurrently, A.M. Best has downgraded the FSR to A (Excellent) from A+ (Superior) and the ICR to “a” from “aa-” of Sun Life Assurance Company of Canada (U.S.) (SLUS) (Wilmington, DE) and Sun Life Insurance and Annuity Company of New York (SLNY) (New York, NY). A.M. Best also has affirmed the ICR of “a-”of Sun Life Financial Inc. (SLF), as well as the existing debt ratings of the enterprise. The outlook for the above ratings is stable.

In addition, A.M. Best has assigned a debt rating of “bbb+” to the recent issuance of CAD 800 million 4.38% Series 2012-1 Subordinated Unsecured Fixed/Floating Debentures of SLF. The outlook assigned to this rating is stable. All companies are domiciled in Toronto, Canada, unless otherwise specified. (See link below for a detailed listing of the companies and ratings.)

The rating affirmations reflect SLF’s strong business profile, with a top three market position in the Canadian life insurance market. SLF has maintained a historically diversified revenue stream from multiple regions, profitable operations in Canada, favorable risk-adjusted capitalization and well developed and fully integrated risk management framework. In addition, A.M. Best notes that SLF and its operating subsidiaries remain well capitalized from a risk-adjusted perspective. SLF also continues to broaden its global footprint by expanding its wealth management and life insurance operation in Asia. A.M. Best notes that SLF has a sophisticated hedging program already in place and steps continue to be taken to further reduce volatility through risk mitigation techniques, such as product redesign. The results of a strategic review announced in late fourth quarter 2011 will focus on reducing earnings volatility and de-emphasizing certain capital intensive product lines.

Offsetting factors include SLF’s reduced earnings trends given its continued exposure to equity markets and interest rate sensitivity, especially in the U.S. operations. SLF reported a net loss of CAD 300 million for the year ended 2011. SLF is exposed to interest rate and equity markets through its insurance and wealth management, and to a lesser extent, its asset management operations. A.M. Best expects lower fixed coverage in the near term, although financial and operating leverage remain at acceptable levels for the current ratings.

The downgrades of the U.S. subsidiaries of SLF reflect A.M. Best’s view of the diminished strategic significance of the U.S. operations given SLF’s plans to discontinue certain key business lines in the United States including its core individual life and variable annuity operations. For the year ended 2011, SLF’s U.S. operations reported an aggregate statutory net loss.

SLUS and SLNY are now effectively in runoff and subsequently are not viewed as core to the group. SLF will be focusing on the U.S. group and voluntary insurance market, growing the company's asset management businesses globally through MFS and its other asset management operations. It should be noted that SLNY will be used to write some of the new group business in New York. Both companies will continue to be supported by SLF as the business slowly runs off the books. The ratings of SLHIC were affirmed based on the continuing reinsurance relationship with the U.S. Branch operation of Sun Life.

A.M. Best believes that Sun Life is well positioned at its current rating level and relative to its peers for the near to medium term. Negative rating actions could occur should equity market volatility and low interest rates continue to impact earnings and capital levels or should investment impairments exceed A.M. Best’s expectations.

Given the downgrades, A.M. Best believes that SLUS and SLNY are well positioned at their current rating level and relative to its peers given their current run-off status for the near to medium term. Further negative rating actions could occur should equity market volatility and low interest rates continue to negatively impact earnings and capital levels or should run-off experience be worse than A.M. Best’s expectations.

For a complete list of Sun Life Financial Inc. and its subsidiaries’ FSRs, ICRs and debt ratings, please see www.ambest.com/press/041101sunlife.pdf.

The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Key criteria utilized include: “Understanding BCAR for Life/Health Insurers” and “Rating Members of Insurance Groups.” Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology.

Founded in 1899, A.M. Best Company is the world’s oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com.