NEW YORK--()--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.
The Negative Outlook reflects the risk that SLF's earnings will remain volatile and the company may be unable to generate run-rate operating earnings and debt service capacity that is supportive of the current rating level. Fitch would view the completion of the 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 as a positive for SLF. The U.S. annuity business has historically been a drag on overall earnings since 2008 as well as a significant consumer of capital.
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 sale. Fitch's expectation is that a significant portion will be used 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 diversification of earnings. However, Fitch's primary concern is that an ill-timed or poorly executed acquisition would negatively impact operating earnings and debt service coverage.
SLF reported operating net income of CAD1.2 billion in the first nine months of 2012 as the net impact of market factors was minimal. Full year 2011 operating net income was CAD104 million and included a number of one-time charges and the unfavorable impact from declines in equity markets and interest rate levels. 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. SLF expects net income for the 2013-2015 period to be reduced by CAD500 million if current interest rate levels persist through the end of 2015.
The affirmation of the ratings reflects SLF's strong capitalization; disciplined investment strategies that have resulted in strong liquidity and solid asset quality; and 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 Sept. 31, 2012. Fitch views SLF's debt service capacity on a Canadian IFRS earnings basis, excluding the impact of equity markets and interest rates, of approximately 6 times (x) during the first nine months of 2012 and 3x in 2011 as volatile for the rating level and below historical levels 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 the minimum continuing capital and surplus requirement (MCCSR) for Sun Life Assurance Company of Canada of 213% at Sept. 30, 2012. The sale of the U.S. annuity business is not expected to have an impact on MCCSR.
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.
KEY RATING DRIVERS
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 Rating 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+';
--5.12% subordinated debentures due 2018 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, at '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-'.
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 at 'A-'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology', dated Oct. 18, 2012.
Applicable Criteria and Related Research:
Insurance Rating Methodology - Amended