DBRS Downgrades SLF to Pfd-2(high)

DBRS has announced that it:

has today downgraded its ratings on the debt and preferred share obligations of Sun Life Financial Inc. (Sun Life or the Company) and its affiliates by a single notch, including the senior debt of Sun Life to A (high) from AA (low). The IC-1 Claims Paying Ability rating of Sun Life Assurance Company of Canada, the Company’s major operating subsidiary, is not affected by this action. The trend on all ratings is Stable. Today’s rating actions resolve DBRS’s September 7, 2012, decision to put the debt and preferred shares of Sun Life Under Review with Negative Implications following a review of industry peers and their ratings. DBRS regards the pre-existing ratings as being out of alignment with the Company’s recent earnings track record and those of its peers.

DBRS recognizes the strength of the Company’s core Canadian franchise, with leading positions in individual life insurance, employee benefits and group retirement services such as pension administration and payout annuities. DBRS also acknowledges that the announced sale of the Sun Life Assurance Company of Canada (U.S.) subsidiary is expected to remove a material source of earnings uncertainty and market risk exposure, which is net positive for the credit. The resulting runoff block of the U.S. life insurance business is also expected to be a long-term, albeit declining, contributor to earnings as will the Company’s MFS Investment Management asset management operation, which continues to experience positive inflows on the back of strong fund performance. Less visible to DBRS is the Company’s growth prospects for its U.S. employee benefits business, which has been investing in development of the targeted voluntary benefits business and in Asia where growth through acquisition and distribution expansion continues to weigh on earnings, at least in the short term.

A recovery in earnings to meet the 15% return on equity and seven times fixed-charge coverage ratio thresholds for AA-rated life insurance companies, as published in the DBRS methodology “Rating Companies in the Canadian Life Insurance Industry” (January 2013), would reflect the Company’s ability to articulate and execute on its chosen strategies. In turn, such a recovery in earnings would put upward pressure on the Company’s ratings. Additionally, a reduction in financial leverage (measured by debt plus preferred shares relative to total capitalization) from the current levels of 29.4% would be viewed favourably.

The Canadian life insurance industry has gone through a fair amount of turmoil over the past five years, largely related to rapid sales growth of wealth management products with embedded equity market guarantees and a continuing low interest rate environment which has resulted in increasing policy reserves and earnings volatility. The related impacts on actuarial assumptions regarding expected market returns, reinvestment rate assumptions and policyholder behaviours have given rise to similar adverse reserve developments and earnings volatility. Risk mitigating hedging activity has also reduced earnings. The impact of reduced earnings has filtered through to downward pressure on capital, which has resulted in the need for additional third party-provided capital in the form of increased financial leverage. Correspondingly, earnings and fixed-charge coverage ratios have remained below former levels and, in the case of Sun Life, below the levels prescribed by the DBRS methodology for a AA-rated life insurance company.

While DBRS recognizes a number of market challenges for the Canadian life insurance industry, it also acknowledges a number of growth opportunities and fundamental credit strengths, including increasingly effective risk management, conservative reserving practices and rigourous regulatory oversight, which support the industry’s relatively strong ratings.

DBRS’ Review-Negative was reported on PrefBlog. When SLF sold its US unit in December 2012, DBRS yawned and Moody’s put the prefs on watch for a possible upgrade.

Sun Life Financial has the following issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E (all DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H & SLF.PR.I (all FixedReset). All are tracked by HIMIPref™ and all are constituents of the indicated subindices. All are now rated Pfd-2(high) by DBRS.

One Response to “DBRS Downgrades SLF to Pfd-2(high)”

  1. […] fact, one can make an argument that the SLF issues are doing better than they should be now, as they were downgraded by DBRS earlier this year, which no longer considers them credit-equivalent to GWO and […]

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