DBRS Morningstar Confirms Sun Life Financial Inc. at A (high) and Sun Life Assurance Company of Canada at AA, Stable Trends

DBRS Limited (DBRS Morningstar) confirmed all ratings of Sun Life Financial Inc. (SLF or the Company) and its related entities, including SLF’s Issuer Rating at A (high) and the Financial Strength Rating of Sun Life Assurance Company of Canada (SLA) at AA. The trends on all ratings are Stable.

KEY RATING CONSIDERATIONS
The ratings and trends reflect SLF’s resilient global franchise, across Canada, the U.S., and multiple countries in Asia, underpinned by significant market shares in many of the business lines that it operates in. SLF has demonstrated consistent profitability in recent years, with earnings benefitting from good expense and claims management. SLF's ratings are also supported by a strong risk management profile, very strong liquidity, good product diversification, and an expanding footprint in the Asian life insurance market and in wealth management globally. The Company also maintains appropriate regulatory capital levels and utilizes relatively low leverage compared with peers, enhancing its financial flexibility. SLF’s ratings also consider the complexities of operating a global insurance organization with an increasing exposure to emerging markets. The Coronavirus Disease (COVID-19) pandemic can still pose additional challenges, particularly given the development of new variants that can disrupt the ongoing economic recovery in most markets where SLF operates.

RATING DRIVERS
The ratings are well placed in their current rating categories. Over the longer term, an upgrade could arise if the Company improves both its leverage and fixed charge coverage ratios after the DentaQuest acquisition, while maintaining strong profitability metrics and appropriate capitalization buffers.

Conversely, 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. A sustained decline in regulatory capital levels combined with a deterioration in financial leverage of more than 30% would also result in a downgrade.

RATING RATIONALE
The Company has an extensive 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 hurdles, including consumers continued transition from active to passively managed funds wither lower fees, as well as 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 allowed the Company to continue operating with minimal disruption during the peak of the 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 identified 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 UK. SLF’s investment portfolio has generally been balanced across asset classes, except for a somewhat elevated exposure to BBB rated bonds and corporate loans in its bond portfolio. However, 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 past several years, and impairments remain low. 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.

Positively, SLF 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. At Q2 2021, SLF’s total assets under management and administration reached a substantial $1.4 trillion. The asset management segment and the Canadian operations are likely to remain the larger profit contributors in the near term, providing considerable earnings stability. Meanwhile, the contributions from SLF’s Asian and U.S. businesses to common shareholders’ net income have been growing, even with some manageable volatility in recent years. The return on equity (ROE) for H1 2021 improved to 16.4% from 8.4% in H1 2020, primarily by business growth and a favourable equity market. Overall, SLF generates a good ROE with a three-year weighted average of 11.7% on a reported basis, which compares favourably to peers.

DBRS Morningstar believes the Company has 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 pressure 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 2021, the Life Insurance Capital Adequacy Test (LICAT) for the consolidated holding company was 147%, higher than SLA’s LICAT of 125%, because the holding company held $3.2 billion of additional assets comprising cash and other liquid assets. In particular, the excess cash at the holding company 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 past five years have also contributed to the Company’s strong capitalization level. At 24.7% for Q2 2021, the leverage ratio (calculated on a consolidated holding company basis) is below the average for the Company’s peers. However, with the pending acquisition of DentaQuest, leverage is expected to reach 27.6%, (as of the Q2 2021 proforma preferred shares redemption on September 29, 2021, and the proforma DentaQuest acquisition) which still provides for financial flexibility.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

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

The principal methodology is the Global Methodology for Rating Insurance Companies and Insurance Organizations (July 16, 2021; https://www.dbrsmorningstar.com/research/381667), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021; https://www.dbrsmorningstar.com/research/373262).

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 resolved within a 12-month period. DBRS Morningstar’s trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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