DBRS Confirms Ratings of Sun Life Financial Inc. and Affiliates

DBRS has today confirmed the ratings for Sun Life Financial Inc. (SLF or the Company) and its major operating subsidiary, Sun Life Assurance Company of Canada (SLA) at the current levels with a Stable trend. The ratings are based on in the strong market position enjoyed by SLA in the Canadian life insurance industry where it is one of the three competitors that dominate the largely oligopolistic market in most insurance and wealth management lines for both individuals and groups. The Canadian operations are complemented by a strategically evolving U.S. market presence in annuity products, individual life insurance and group benefits operations as well a growing presence in Asia, notably in Hong Kong, India and China, all of which benefit from the Company’s financial strength and reputation. The Group’s Sun Life Global Investments subsidiary holds the Group’s asset management businesses including the 96%-ownership in MFS Investment Management, which complement the more stable protection businesses with growth opportunities in retail mutual funds and institutional managed assets, albeit with larger exposures to more volatile equity markets.

In response to negative pressure on earnings in 2008 and 2009, the Company continues to leverage its extensive Enterprise Risk Management (ERM) framework to continue to enhance product pricing and design, especially in the U.S. annuity segments. To address the Company’s earnings performance in its U.S. segments, a new management team was hired in the United States (primarily former executives of Lincoln National) which has now completed a strategic review of the Company’s U.S. operations and is refocusing on sustainable and profitable market segments. To complement the strategic shift in the U.S. business segments, there is a renewed focus on marketing and distribution, including a high profile advertising campaign intended to broaden the awareness of the Sun Life brand which DBRS believes should address some of the U.S. segment’s earnings deficiencies over time.

In response to market developments, a heightened sense of caution and low cost funding opportunities, the Company has raised $1.25 billion in additional capital over the past year in the capital markets in addition to raising $2.2 billion from the sale of a 37% stake in CI Financial to the Bank of Nova Scotia, which has been retained and/or redeployed into the Company’s operating subsidiaries as regulatory capital as required. At SLA, MCCSR regulatory capital ratio is well in excess of 200% at close to 230% (pro forma the recent SLEECS issue) which is acceptable to DBRS given the risk exposures at SLA and the current uncertain economic and market environment. Additionally, $1.3 billion capital has been advanced over the past 12 months to Sun Life (US) which houses the annuity business that experienced most of the losses associated with credit deterioration and the weaker equity markets and to the Sun Life US branch which houses the protection business.

However, as capital has increased, the Company has indicated that it is content to operate with a higher level of financial leverage than it had previously, bringing it into alignment with the more aggressive capitalization of Great-West Lifeco and Manulife Financial. Pro forma the recent $500 million SLEECS issue, the Company’s third quarter total debt to capital ratio including preferred shares would be 31.3%, up from 24.4% at the end of 2007. At this level of financial leverage, given the current ratings, the Company’s financial flexibility is limited to resources on hand unless it chooses to issue common equity or reduce its common dividend. DBRS feels that the Company has little latitude to issue additional debt instruments without threatening the currently assigned credit ratings.

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

The applicable methodology is Rating Canadian Life Insurance, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.