A.M.Best Downgrades SLF Preferreds to bbb+

A. M. Best has announced:

has downgraded the financial strength rating (FSR) to A+ (Superior) from A++ (Superior) and issuer credit ratings (ICR) to “aa” from “aa+” for the core life insurance subsidiaries of Sun Life Financial Inc. (SLF) (Toronto Canada), which consist of Sun Life Assurance Company of Canada (Sun Life) (Toronto, Canada), Sun Life Assurance Company of Canada (U.S.) (Wilmington, DE) and Sun Life Insurance and Annuity Company of New York (New York, NY). Concurrently, A.M. Best has downgraded the ICR to “a” from “aa-” of SLF as well as the existing debt ratings of the enterprise. The downgrading of the debt ratings reflects a revision to standard notching for the group in accordance with A.M. Best’s published debt rating methodology. The outlook for all ratings is stable. (See link below for a detailed listing of the companies and ratings.)

The downgrades reflect the challenges SLF faces due to stresses in the global macroeconomic environment, especially in its U.S. operations. The prolonged weakness in the equity markets has negatively impacted both SLF’s insurance operations—through higher reserve and capital charges and lower fee income—and its asset management operation, MFS, which has recorded lower assets under management. SLF’s U.S. insurance operations recorded a loss in 2008 due to the impact of equity market declines, credit related losses, as well as, the unfavorable impact of changes in currency exchange rates as well as credit impairment losses. While risk-adjusted capital levels at the group remain strong, the U.S. operations have required capital contributions, reducing financial flexibility for the group. Despite this additional funding, A.M. Best believes its targeted U.S. risk-based capital levels will remain modest relative to its peers.

While its U.S. segment reported the weakest results in 2008, SLF also recorded declines in earnings in its Canadian and Asian operations. A.M. Best believes that earnings will remain under pressure for the group, resulting in lower fixed coverage, due to continued equity market weakness and higher asset impairments. SLF retains exposure to real estate-linked assets through its investments in commercial mortgage loans, direct real estate and residential and commercial mortgage-backed securities. A.M. Best notes that a large portion of SLF’s real estate portfolio is underwritten in Canada, which is expected to continue to perform better than similar investments in the United States.

The stable outlook is based on SLF’s diversified revenue stream from multiple regions, profitable operations in Canada, favorable risk-adjusted capitalization and well developed and fully integrated risk management framework. The year-end regulatory capital ratio in Canada is considered strong. SLF is a Canadian-based holding company with a top three market position in the Canadian insurance market. SLF also maintains an expanding wealth management and life insurance operation in Asia.

There is a complete list of ratings available.

This announcement follows a Credit Watch Negative by S&P and a downgrade to Baa2 by Moody’s.

Recently, A.M. Best has

Sun Life Financial has the following issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E. All are tracked by HIMIPref™ and are incorporated in the PerpetualDiscounts subIndex.

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