New York, January 26, 2012 -- 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.
RATINGS RATIONALE
U.S. Operations
Moody's said that the downgrade of Sun Life US reflects its weakened
intrinsic credit profile, which was lowered to Baa2 from A3,
due to the run-off status of the company and the inherent economic
earnings and capital volatility associated with its sizable inforce book
of variable annuity (VA) liabilities. Last month, SLF announced
its decision to cease the sale of VAs at Sun Life US as of December 30,
2011. The rating agency added that the downgrade also reflects
Moody's view of SLF's more limited commitment to Sun Life US's
business, given its December 2011 announcement.
"We now view Sun Life US as a non-core, runoff operation,
with the decline of its US market presence given the termination of new
business and the gradual runoff over time of its VA, fixed annuity,
and other institutional liabilities," said Laura Bazer,
Vice President and Senior Credit Officer. The rating agency added
that the A3 IFS rating includes two notches of uplift from its stand-alone
credit profile given the expectation of continued ownership by SLF and
of some support being provided by the group, if necessary.
Moody's expects SLF will maintain good capital adequacy at Sun Life
US, with NAIC Risk Based Capital (RBC) in the 300%-350%
range.
Commenting further on the shutdown of Sun Life US' VA business,
Bazer said, "While the cessation of new VA sales ends the
accumulation of new VA risk, it does not eliminate the risk of future
losses on the inforce block if policyholder behavior deteriorates relative
to reserve assumptions, or if equity market declines and continued
low interest rates are not fully offset by hedging." Sun
Life US will also face the challenge of managing expense reductions at
its Wellesley, MA campus, as the operation shrinks.
In December 2011, SLF also ended the sale of life insurance products
offered by the U.S. branch of SLA, although the branch
will continue to focus on the sale of employee and voluntary products
in the U.S.
Canadian Operations
Commenting on the affirmation of the Aa3 IFS ratings of SLA and other
Canadian-affiliated companies, Moody's said that it
is based on the company's excellent top-three market position
in Canada, strong product risk and diversification, strong
and predictable Canadian earnings, and solid capitalization.
The rating agency believes excess capital resources are available at SLA
to support Sun Life US under a stress scenario.
"While negative for the credit profile of the U.S.
operations, we view the discontinuation of U.S. VA
sales as potentially having longer term positive implications for SLF
and SLA," said Vice President, David Beattie.
"The shutdown of new VA sales will limit future growth of the organization's
exposure to the chronically poor earnings performance of the U.S.
subsidiary, as well as to the equity market and interest rate sensitivity
inherent in its VA products," the analyst added.
Holding Company
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.
Negative Outlook
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.
Rating Drivers
Moody's said the following factors could result in a downgrade of
Sun Life US' ratings: NAIC RBC ratio below 300% on
a sustained basis; a downgrade of SLA's rating; and/or
a reduction in SLF's indicated capital support of the U.S.
subsidiary or sale of the company. Conversely, successful
execution of the run-off plan for Sun Life US with stable capital
generation and sustainable reductions in run rate expenses could return
the negative outlook to stable.
The following factors could result in a downgrade of SLA's rating:
a decline in return on capital (ROC) below 8% on a sustained basis
with increased earnings volatility; MCCSR ratio at SLA below 200%;
consolidated financial leverage at SLF keeping above 30% for a
sustained period; consolidated earnings below 8x and cash coverage
below 5x for a sustained period.
Conversely, the following could result in a return of the outlook
on SLA's rating to stable from negative: a return to stable
and sustainable consolidated profitability with an ROC of at least 8%;
successful execution of the run-off plan for Sun Life US with stable
capital generation and sustainable reductions in run rate expenses;
and financial leverage below 30% and earnings coverage above 8x
and cash coverage above 5x.
SLF's rating could be downgraded if there is a downgrade of SLA
or a downgrade of the stand-alone credit profile of Sun Life US.
On the other hand, the negative outlook of SLF could return to stable
if the outlooks of Sun Life US and SLA return to stable.
The following ratings were downgraded with a negative outlook:
Sun Life Financial, Inc. -- preferred stock
to Baa3 (hyb) from Baa2 (hyb);
Sun Life Assurance Company of Canada (U.S.) --
insurance financial strength rating to A3 from Aa3;
Sun Life Financial Global Funding, L.P. --provisional
backed senior secured debt to (P) Baa1 from (P)A1;
Sun Life Financial Global Funding III, L.P. --
senior secured debt to Baa1 from A1; provisional backed senior secured
rating to (P) Baa1 from (P)A1;
Sun Life of Canada (US) Holding Inc. -- preferred
stock to Baa3 (hyb) from Baa1 (hyb);
The following ratings were affirmed with a negative outlook:
Sun Life Assurance Company of Canada -- insurance financial
strength at Aa3;
Clarica Life Insurance Company -- backed subordinate debt
at A2;
Sun Life Capital Trust -- preferred stock at A3 (hyb);
Sun Canada Financial Co. -- backed subordinate debt
at A2.
Sun Life Financial, Inc., headquartered in Toronto,
Canada, reported total C-IFRS general and segregated fund
assets of approximately $216 billion and total common shareholder's
equity of $17 billion at September 30, 2011. At September
30, 2011, Sun Life Assurance Company of Canada (U.S.)
reported total general and separate account assets of approximately $45
billion and statutory surplus of $1.7 billion.
The principal methodology used in this rating was Moody's Global Rating
Methodology for Life Insurers, published May 2010. Please
see the Credit Policy page on www.moodys.com for a copy
of this methodology.
Moody's insurance financial strength ratings are opinions of the ability
of insurance companies to pay punctually senior policyholder claims and
obligations.
REGULATORY DISCLOSURES
Although this credit rating has been issued in a non-EU country
which has not been recognized as endorsable at this date, this credit
rating is deemed "EU qualified by extension" and may still
be used by financial institutions for regulatory purposes until 31 January
2012. ESMA may extend the use of credit ratings for regulatory
purposes in the European Community for three additional months,
until 30 April 2012, if ESMA decides that exceptional circumstances
arise that may imply potential market disruption or financial instability.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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this announcement provides relevant regulatory disclosures in relation
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this announcement provides relevant regulatory disclosures in relation
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Laura Bazer
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
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Robert Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
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Moody's downgrades Sun Life Financial's U.S. operating sub (IFS to A3), and holding company preferred stock (to Baa3 (hyb); affirms Canadian operating subs (IFS at Aa3)
