SLF Downgraded, Outlook Negative, by Moody's

On January 26, Moody’s announced:

Moody’s Investors Service has downgraded the insurance financial strength (IFS) rating of Sun life Assurance Company of Canada (U.S.) (Sun Life US) — a wholly owned subsidiary of Sun Life Financial, Inc. (SLF: TLS; SLF) – to A3 from Aa3. Other affiliated U.S. ratings were also downgraded (see complete ratings list, below). Moody’s also downgraded the preferred stock rating of SLF to Baa3 (hyb) from Baa2 (hyb), but affirmed the Aa3 IFS rating of SLF’s Canadian insurance subsidiary, Sun Life Assurance Company of Canada (SLA), as well as the ratings of other Canadian affiliates. The outlook on all ratings of SLF and its Canadian and U.S. affiliates is negative. The action concludes a review for possible downgrade of Sun Life US and its affiliates, initiated on October 18, 2011.

Commenting on the downgrade of the SLF preferred rating to Baa3 (hyb) from Baa2 (hyb), Moody’s said that it reflects a widening of the typical 3-notch differential that previously existed between SLF’s implied senior debt rating and the Aa3 IFS rating of SLA, because of: 1) the weakening of the stand-alone credit profile of Sun Life US; and 2) the credit profiles of SLF’s other key operating subsidiaries (i.e., MFS; UK insurance, and Asia insurance — not rated by Moody’s), which are relatively weaker than the Aa3 IFS rating on SLA. In addition, SLF’s financial flexibility has diminished due to the significant accounting charges taken during 2011 — mostly associated with the problematic Sun Life US business — which have reduced SLF’s capital, increased its financial leverage, and decreased its debt service coverage ratios.

Commenting on the negative outlook for the entire SLF group, the rating agency noted its concerns related to the execution risks of the runoff strategy for the U.S. businesses and that any further charges arising from Sun Life US’ and the U.S. branch’s closed blocks would remain a drag on SLF’s consolidated earnings, and possibly SLA’s earnings. The negative outlook on SLA also reflects the potential of additional capital support being needed at Sun Life US. Furthermore, there is uncertainty about the timing for SLF to lower its currently elevated financial leverage, as well as future capital releases from Sun Life US to SLF and the profitability of the remaining employee benefits and voluntary product businesses at the U.S. branch, now that its life insurance business and the U.S. subsidiary’s operations are in run-off.

Moody’s stated that SLF expects run rate expenses for the U.S. subsidiary to be reduced by $160 -$180 million annually, and capital to be released over time. “This strategy is not without execution risk, however, and waiting to see at least a few quarters of experience before addressing the outlook for the organization as a whole is appropriate at this time”, Beattie added.

SLF has a lot of preferreds outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) as well as SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and all are assigned to the indices noted.

One Response to “SLF Downgraded, Outlook Negative, by Moody's”

  1. […] Negative Watch was reported on PrefBlog on December 14. In the interim, Moody’s downgraded SLF. S&P rates the preferreds P-2(high); DBRS viewed the 11Q4 results as non-material and […]

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