DBRS Morningstar Confirms Sun Life Financial Inc. at A (high) and Sun Life Assurance at AA; Stable Trends

DBRS Limited (DBRS Morningstar) confirmed Sun Life Financial Inc.’s (SLF or the Company) Issuer Rating and Senior Unsecured Debentures rating at A (high) as well as its Subordinated Unsecured Debentures rating at “A” and Preferred Shares rating at Pfd-2 (high). DBRS Morningstar also confirmed Sun Life Assurance Company of Canada’s (Sun Life Assurance or SLA) Financial Strength Rating and Issuer Rating at AA and its Subordinated Debt rating at AA (low). At the same time, DBRS Morningstar confirmed Sun Life Capital Trust’s SLEECS Series B rating at A (high). All trends are Stable.

KEY RATING CONSIDERATIONS
The ratings confirmation reflects SLF’s global franchise, encompassing Canada, the U.S., and multiple countries in Asia, and its sizable market shares in many of the business lines that it operates in. SLF’s operations are expansive and diversified, with the Company’s product suite including individual and group insurance products as well as wealth and asset management. The Company utilizes multiple distribution channels, including both captive and independent agents, bancassurance, and direct to consumer, all of which have contributed to growth. SLF has demonstrated consistent profitability in recent years, with earnings benefitting from good expense and claims management. The Company’s risk management practices are thorough and conservative, with SLF having taken several actions in the past few years to derisk its product portfolio, further improve the quality of its invested assets, and reduce its exposure to market and credit risks. Measures to improve the risk profile are particularly important, given the Company’s sizable books of closed life insurance businesses that can lend volatility to earnings as well as an invested assets portfolio that has a higher proportion of BBB-rated bonds. SLF has abundant liquidity in the form of a highly marketable investment portfolio, recurring premium inflows, and the availability of contingent liquidity sources. The Company also maintains good regulatory capital levels and utilizes relatively low leverage, enhancing its financial flexibility.

RATING DRIVERS
Given the already high rating level and uncertain macroeconomic environment, a ratings upgrade is unlikely in the near term. In the longer term, an upgrade could arise from continued progress with SLF's business diversification strategy while maintaining a conservative risk profile, as well as from an improvement in asset quality, including having a larger proportion of higher-rated bonds (rated “A” or higher) in its investment portfolio.
The ratings would be downgraded if the Canadian business, a strong contributor to overall results, were to report a sustained decline in earnings, indicating a weakened franchise. Moreover, a substantial decline in regulatory capital levels or a sustained deterioration in financial leverage over 30% would result in a downgrade.

RATING RATIONALE
The Company has an expansive global franchise and strong market position in several of the businesses that it operates in. SLF has successfully maintained leading market shares in the Canadian market, where it has significant positions in the group benefits and retirement and individual insurance and annuities spaces. The Company’s U.S. operations comprise a comprehensive suite of group benefits products, including stop-loss insurance in which it is a market leader. SLF’s primary asset management business, MFS, continues to generate consistent fee income despite numerous headwinds, including a trend towards passively managed funds that is pressuring fees, and increasing regulatory and compliance costs. Positively, SLF continues to strengthen its market positions in Asia, where it operates in numerous jurisdictions. The Company also has a large presence in the Philippines and in the Hong Kong mandatory pension fund space, with growing operations in India, Vietnam, China, Malaysia, and Indonesia. The Company’s strategy is innovative and forward-thinking, with substantial technological investments positioning it well for the future and allowing it to remain competitive. Prior investments in digital tools have allowed the Company to continue operating with minimal disruption during the Coronavirus Disease (COVID-19) pandemic-induced lockdowns.

SLF’s ratings also benefit from the Company's comprehensive and well-developed risk management framework which ensures that risks are well understood and mitigated. The Company faces residual risks as a result of its sizable legacy businesses with runoff blocks of life insurance businesses in the U.S and the U.K. SLF’s investment portfolio has generally been balanced across asset classes, except for a somewhat elevated, albeit declining, exposure to BBB-rated bonds and increasing exposure to corporate loans in its bond portfolio. While this latter exposure is increasing, the credit risk associated with the corporate loan portfolio is partly mitigated by the Company’s strong credit risk management approach to its privately-placed bond holdings. The investment portfolio is delivering good investment yields that have contributed to SLF's strong and stable earnings performance in the last several years and impairments remain low. Impairments may be expected to increase, given the uncertainty regarding the extent of the economic recovery from the coronavirus pandemic. The Company’s extensive hedging programs help to mitigate some of the volatility in earnings and regulatory ratios that may arise from adverse movements in equity markets or interest rates. SLF is making enhancements to protect its business from further declines in interest rates, including repricing certain products.

Positively, the Company has made progress with the diversification of its four-pillar enterprise strategy. SLF’s asset management segment generally generates at least 30% of common shareholders' net income and is an important component in diversifying SLF’s earnings in noninsurance business. At Q2 2020, total assets under management and administration reached a substantial $1.2 trillion. The asset management segment and the Canadian operations are expected to remain the larger profit contributors in the near term, providing considerable earnings stability. Meanwhile, the contributions from SLF Asia and the U.S. businesses to common shareholders’ net income have been growing, even with some manageable volatility in recent years. While return on equity (ROE) for H1 2020 declined to 8.3% from 11.3% in H1 2019, primarily due to a volatile market environment, the results are still considered strong, given the challenging operating environment in 2020. Overall, SLF generates a good ROE with a three-year weighted average of 12% on a reported basis, which compares favorably to peers.

DBRS Morningstar views the Company as having excellent liquidity supported by an investment portfolio that comprises a high proportion of cash and marketable bonds and equities. As is typical for a life insurer, the claims profile is relatively predictable, with a very low probability of a high-severity event occurring that would put pressure on the Company’s resources. SLF’s liquidity profile benefits from a steady stream of recurring premium income with the Company also maintaining standby credit facilities to meet financial obligations under adverse stress scenarios. Positively, SLF has only a limited proportion of nonliquid assets in its investment portfolio.

SLF has conservative capital management, with the Company maintaining stable regulatory ratios and an excess of cash at both the operating company and holding company levels. As of Q2 2020, the Life Insurance Capital Adequacy Test (LICAT) for the consolidated holding company was 146%, higher than SLA’s LICAT of 126%, as the holding company held $3.5 billion of additional assets comprising cash and other liquid assets. The excess cash at the holding company in particular, should allow SLF to make strategic acquisitions and pursue growth opportunities as well as provide a buffer against any adverse scenarios. Solid earnings in the last five years have also contributed to the Company’s strong capitalization level. At 23.2% for Q2 2020, the leverage ratio (calculated on a consolidated holding company basis) is low relative to peers, enhancing financial flexibility. Moreover, SLF has good organic capital generation capabilities.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

The Grid Summary Scores for SLF are as follows: Franchise Strength – Strong; Risk Profile –Strong/Good; Earnings Ability – Strong; Liquidity – Very Strong; Capitalization – Strong.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is the Global Methodology for Rating Life and P&C Insurance Companies and Insurance Organizations (July 21 2020, https://www.dbrsmorningstar.com/research/364260/global-methodology-for-rating-life-and-pc-insurance-companies-and-insurance-organizations).

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found on the issuer page at www.dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com.

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