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 CREDIT RATING CONSIDERATIONS
The ratings and Stable trends reflect the Company’s well-established global franchise, across Canada, the U.S., and multiple countries in Asia, underpinned by significant market shares in many of its business lines. SLF has demonstrated consistent profitability in recent years, with earnings benefitting from the Company’s diversified business model as well as good expense and claims management. SLF has a strong/good risk management profile, very strong liquidity, and excellent product and geographic diversification. The Company has an expanding footprint in the Asian life insurance market and in wealth management globally. SLF maintains appropriate regulatory capital levels and has manageable leverage, enhancing its financial flexibility. The Company’s ratings also consider the complexities of operating a global insurance organization with an increasing exposure to emerging markets. It also takes into consideration the impact of financial market volatility on the Company’s H1 2023 net earnings primarily reflecting rising interest rates and shifts in the valuation of real estate investments.

CREDIT RATING DRIVERS
The ratings for SLF are well placed in their current rating category. Over the longer term, DBRS Morningstar would upgrade the ratings if the Company improves its overall profitability and risk profile while strengthening capitalization buffers.

Conversely, DBRS Morningstar would downgrade the ratings if the Canadian business, a strong contributor to overall results, were to report a persistent decline in earnings and a weakened franchise. A sustained decline in regulatory capital levels combined with a significant deterioration in financial leverage would also result in a ratings downgrade.

CREDIT RATING RATIONALE
The Company is one of Canada's top three life insurers, a market leader in the Philippines and in the Hong Kong Mandatory Provident Fund market, and a top 10 player in most of the other Asian countries that it operates in. Additionally, SLF has a strong presence in the U.S. group benefits market where it is a leading independent stop-loss insurance provider and a strong competitor in group life and disability. The Company's presence in the U.S. has been further strengthened with the acquisition of DentaQuest, a leader in dental benefits in the U.S. market. Overall, SLF benefits from its strong global brand recognition, a well-diversified business model both by geography and by product, and extensive product distribution capacity. SLF’s asset management businesses provide an unrestricted source of dividends (without regulatory capital restrictions) to the holding company and increase the diversification of earnings.

SLF's ratings benefit from the Company's comprehensive and well-developed risk management framework that encompasses its diverse businesses, operations in multiple countries, and investment risk categories that ensure its risk exposures are well understood and mitigated. Additionally, the Company’s extensive hedging programs help to mitigate most of the volatility in earnings and regulatory ratios that may arise from adverse movements in equity markets or interest rates. Positively, over the past few years, SLF has shifted toward a lower-risk product portfolio, exited unprofitable or capital-intensive businesses. The Company has a sizable amount of mortgages and loans on its balance sheet, which exposes it to credit risk; however, the majority of them are rated investment grade, with low loan-to-value ratios. A significant portion of SLF’s mortgage portfolio is insured by the Canada Mortgage and Housing Corporation which mitigates the Company’s credit risk exposure.

DBRS Morningstar views SLF as having strong earnings ability from its multiple business segments. The Company's continued progress on its four-pillar enterprise strategy has increased the diversity of earnings, positioning SLF well for future growth while maintaining resilient earnings stability. 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 consistently positive. Overall, SLF generates good return on equity which compares favourably with peers.

DBRS Morningstar also believes SLF has very strong liquidity. The Company’s liquidity profile is supported by the significant amount of cash, cash equivalents, and short-term securities on its balance sheet and an investment portfolio that comprises a high proportion of marketable bonds and equities with about 20% of its bond portfolio rated AAA as at H1 2023. Positively, the Company has only moderate proportion of riskier nonliquid assets in its investment portfolio, which is dominated by investment-grade bonds. The Company's claims profile is relatively predictable, with a very low probability of claims arising to a level that would cause a liquidity problem, especially with SLF using reinsurance as appropriate.

The Company and its main operating insurance subsidiary, SLA, have maintained appropriate regulatory capital ratios. With sizable cushions over regulatory minimums under the Life Insurance Capital Adequacy Test (LICAT) framework, SLF is well positioned to navigate adverse scenarios. The Company's foreign subsidiaries also meet local regulatory capital rules of the jurisdiction where they operate. SLF’s capitalization level supports the Company’s ratings and Stable trends. As of H1 2023, SLA's LICAT was 139% (127% as at year-end (YE) 2022), and the LICAT ratio for the consolidated holding company was even higher at 148% (130% as at YE 2022). The increase in the LICAT ratios for both SLF and SLA was partly driven by the transition from IFRS 4 to IFRS 17.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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 (4 July, 2023) at https://www.dbrsmorningstar.com/research/416784.

The Grid Summary Grades for Sun Life Financial Inc 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 14, 2023; https://www.dbrsmorningstar.com/research/417109). In addition, DBRS Morningstar uses the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (https://www.dbrsmorningstar.com/research/416784) in its consideration of ESG factors.

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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 credit ratings are under regular surveillance.

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

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