PrefBlog

DBRS has announced that it:

has today placed its ratings of the debt and preferred share instruments of Sun Life Financial Inc. (Sun Life or the Company) and its affiliates Under Review with Negative Implications. The Claims Paying Ability rating of IC-1 assigned to The Sun Life Assurance Company of Canada has been confirmed. The rating action reflects the Company’s recent weak profitability and earnings volatility associated with exogenous market factors over the past several years. While these exposures are not unique to Sun Life, DBRS regards the current ratings, following a review of the industry, as being out of alignment with the Company’s recent earnings track record and those of its peers. The action also reflects uncertainty associated with the Company’s strategic transition as it attempts to restore profitability and earnings stability by pursuing more profitable products with fewer embedded risks and lower capital requirements. Sun Life faces a number of challenges in this regard, including associated execution challenges and the continuing weak economic and interest rate environment aggravated by evolving regulatory and accounting regimes.

The strength of the Company’s Canadian franchise, a growing appetite for its products and services, a reasonable level of diversification in attractive market niches in the United States and Asia, and conservative risk management are nevertheless not sufficient for Sun Life to maintain its current ratings in the absence of a recovery in core earnings and reduced earnings volatility to levels that are at least consistent with its 2015 earnings target of $2 billion (with a return on equity of between 12% and 14%). The resolution of the Under Review with Negative Implications status therefore hinges largely on an imminent return to reasonable profitability which would cover the Company’s fixed charges by at least 5.0 times. However, DBRS regards as ambitious the revenue growth assumptions underlying the achievement of such earnings.
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The Company’s financial performance in recent years suggests that its enterprise risk management platform, while regarded as superior, has mitigated but not eliminated earnings volatility tied to recent market conditions. In addition, hedging costs have put downward pressure on earnings. The requirement for additional regulatory capital at its operating subsidiaries in the wake of the financial crisis and the transition to International Financial Reporting Standards (IFRS) increased the Company’s consolidated financial leverage to 31% at June 30, 2012, from just over 21% five years ago. Without earnings to support the associated debt service costs, the five-year average fixed-charge coverage ratio has dropped to below 2.0 times from 8.0 times for the period prior to the financial crisis. The core fixed-charge coverage ratio, excluding volatile market-related factors, has similarly fallen to below 5.0 times from over 8.0 times, which is below the level expected for a company with the current ratings.
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DBRS intends to resolve the Under Review status within the next few months, following its annual review with the Company’s management team.

DBRS maintains its rating of Pfd-1(low) for the preferreds. S&P has them at P-2(high) [Outlook Negative]; the Outlook Negative was assessed in February, 2012. Moody’s downgraded the preferreds to Baa3(hyb) in January, 2012 and they remain at that level.

SLF has the following issues outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D & SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H & SLF.PR.I (FixedReset).

This entry was posted on Saturday, September 8th, 2012 at 3:02 pm and is filed under Issue Comments. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.