Moody's puts SLF on Review-Negative

Moody’s has announced:

oody’s Investors Service has placed on review for possible downgrade the Aa3 insurance financial strength (IFS) rating of Sun life Assurance Company of Canada (U.S.) (Sun Life US), the wholly-owned U.S. life insurance subsidiary of Sun Life Financial Inc. (SLF: TSX;SLF; preferred stock at Baa2 (hyb)). Other affiliated U.S. ratings were also placed on review for possible downgrade (see list, below). Moody’s has also affirmed the Aa3 insurance financial strength rating of SLF’s Canadian subsidiary, Sun Life Assurance Company of Canada (SLA), and the ratings of other Canadian affiliates, but changed the outlook to negative from stable. The rating actions follow SLF’s pre-announcement of a $621 million IFRS loss for 3Q11, and a further estimated $500 million reduction in fourth quarter consolidated net income, due to a method and assumption change related to the valuation of its variable annuity and segregated fund liabilities.


Commenting on the review for possible downgrade of Sun Life US, Moody’s said that the pre-release of SLF’s 3Q11 IFRS earnings, announcing sizable consolidated operating and net losses, was largely related to the interest rate and equity market sensitivity of its US business, much of which is at Sun Life US (with the remainder at the US branch of SLA). The announced $500 million charge to 4Q11 is also largely related to the US operations. Moody’s Vice President David Beattie said, “Sun Life US had been experiencing persistent earnings weakness and volatility over multiple quarters due to its equity market exposure and emphasis on variable annuity sales. Despite hedging programs, earnings volatility and potential economic losses related to interest rate and equity market sensitivity continues to be a credit concern. “

Moody’s stated that the change in SLA’s outlook to negative reflects the group’s diminished full-year consolidated profitability as a result of these charges and anticipated continued drag on earnings from Sun Life US, as well as weaker financial flexibility due to capital charges and the potential need to maintain higher than historical levels of capital to support the U.S. operations. SLA currently remains well capitalized with a MCCSR of approximately 210% as at September 30, 2011, down from 231% at the end of 2Q11.

The following ratings were affirmed and the outlook changed to negative from stable:

Sun Life Financial, Inc. — preferred stock at Baa2 (hyb)

Moody’s does not rate the other four investment grade Canadian insurers.

This announcement follows SLF’s announcement of big charges in a press release that I discussed on October 17.

SLF has many preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (all DeemedRetractible) as well as SLF.PR.F, SLF.PR.G and SLF.PR.H (all FixedReset).

DBRS commented:

The majority of the loss consists of the adverse impact of the unprecedented decline in long-term interest rates and in equity markets between the second and third quarters in the U.S. and Canadian markets, which DBRS estimates having cost the Company close to $700 million, as well as a $200 million adverse reserve adjustment as a result of a change in the Company’s actuarial methods and assumptions. This annual adjustment to actuarial assumptions occurs normally in the third quarter of each fiscal year. Offsetting these items are core earnings of $400 million.

DBRS is concerned that market exposures, which are largely hedged, continue to have an outsized impact on reported earnings, albeit within the sensitivities published by the Company. If interest rates and equity markets continue to experience downward pressure from the uncertain economic environment, with an accompanying increase in earnings volatility, DBRS will have to review its rating on the life insurance industry generally, which could give rise to negative rating actions for insurance companies with relatively large capital markets exposures.

As a result of the weak Q3 2011 results, the Minimum Continuing Capital and Surplus Requirements (MCCSR) ratio for the Company’s major operating subsidiary, Sun Life Assurance Company of Canada, is expected to fall to 210% from 231% at the end of Q2 2011. This result remains above the Company’s target ratio of 180% to 200%. Nevertheless, the Company’s financial flexibility will have deteriorated.

S&P remarked:

Standard & Poor’s Ratings Services said today that its ratings on Sun Life Financial Inc. (SLF; A/Stable/A-1) and Sun Life Assurance Co. of Canada (SLA; AA-/Stable/A-1+) and other rated affiliates (collectively Sun Life) are unchanged following the company’s pre-release of expected third-quarter results before the scheduled Nov. 3, 2011, earnings call, including comments on planned accounting changes in the fourth quarter. Sun Life’s reported results are within our ratings expectations not withstanding the lower equity markets’ and interest rates’ impact on earnings and capital.

Given the very low interest rates, the potential for further declines, particularly in the rates on U.S. treasuries, is limited.

We view Sun Life’s planned accounting revision for its hedging costs as inherently neutral to the ratings because it does not represent a change in the economics of the business.

3 Responses to “Moody's puts SLF on Review-Negative”

  1. […] The fund’s returns in November were hurt by a steep decline in the price of SLF preferreds, which have been afflicted in recent months by relatively poor financial results and bouts of selling (see Who’s Selling all the SLF Preferreds? and Moody’s puts SLF on Review-Negative). […]

  2. […] poor financial results and bouts of selling (see Who’s Selling all the SLF Preferreds? and Moody’s puts SLF on Review-Negative) and has not yet shown significant signs of […]

  3. […] poor financial results and bouts of selling (see Who’s Selling all the SLF Preferreds? and Moody’s puts SLF on Review-Negative) but is showing signs of […]

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