Fitch Affirms Sun Life Financial Inc.'s Ratings; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Sun Life Financial Inc. (TSE, NYSE: SLF) including its senior and subordinated notes, as well as the Insurer Financial Strength (IFS) ratings of SLF's primary Canadian insurance subsidiary, Sun Life Assurance Co. of Canada (SLAC), at 'AA-'. A full list of ratings follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Today's rating action reflects SLF's strong capitalization, improved earnings and fixed-charge coverage, solid asset quality and stable operating profile. The ratings also reflect the company's leading market position in Canada and continued growth in the U.S. and emerging Asian markets.

Offsetting factors include sustained low interest rates and sluggish global economic growth. Fitch's ratings also consider SLF's exposure to equity market volatility given that approximately 80% of MFS Investment Management's (MFS) assets under management (AUM) are comprised of equities.

Fitch notes that SLF has met, or is close to meeting, multiple upgrade triggers. Any positive future rating action will be driven by the company's ability to sustain recent improvements in financial performance and maintain current strong balance sheet fundamentals.

Fitch views SLF's competitive position as strong in Canada, as one of the three largest insurers that serve more than two-thirds of the insurance market. SLF is a significant competitor among the top three companies in every market and major product line in which it competes in Canada.

On March 1, 2016, SLF acquired Assurant's Employee Benefits (Assurant EB) business, which increased its scale and capabilities in the U.S. group benefits market making SLF the sixth largest market player.

Fitch views SLF as very strongly capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) for SLAC of 216% at March 31, 2016. The company's strong balance sheet fundamentals also include extremely low asset and operating leverage. Financial leverage remained modest at 14% and total financing and commitments (TFC) ratio, which includes operating debt, is considered moderate at 0.6x as of March 31, 2016.

SLF continued its favorable earnings trend with a 17% increase in operating earnings to C$2.3 billion in 2015. The improvement was primarily driven by increased fee income from greater average net assets and earnings growth in Asia. Results also benefited from pricing actions in U.S. group benefits and a weakening Canadian dollar. The company reported 19% operating earnings growth in first-quarter 2016, which included one month of earnings from Assurant EB.

SLF reported an underlying return on equity (ROE) of 13.0% in 2015 and 12.4% in first-quarter 2016, which is in line with its medium-term objective of 12%-14%. The net impact of market factors remains relatively modest, as unfavorable equity markets and lower interest rates were somewhat offset by gains from credit spreads and swaps.

SLF's fixed-charge coverage, excluding the net impact of market factors and assumption changes, has shown continued improvement in recent years to 10.4x in 2015 and 9.9x in first-quarter 2016. This compares with 7.9x in 2014.

SLF's asset management business, made up of MFS and Sun Life Investment Management (SLIM), enhances the company's earnings diversification and provides a source of unregulated cash flow to the holding company. The segment's assets under management (AUM) increased 26% in 2015, primarily due to the favorable impact of a weakening Canadian dollar and the 2015 acquisitions in SLIM of Ryan Labs, Prime Advisors and Bentall Kennedy. AUM declined 5% during first-quarter 2016 to C$601 billion, primarily driven by strengthening of the Canadian dollar during the period.

MFS reported AUM of $418 billion as of March 31, 2016 compared with $413 billion and $431 billion at years end 2015 and 2014, respectively. Equity market increases offset net outflows in first-quarter 2016. MFS's pretax operating profit margin ratio declined to 37% as of March 31, 2016, compared with 40% and 41% in 2015 and 2014, respectively. Fitch expects continued market volatility and industry trends to passively managed funds to present a challenging environment for MFS during 2016.

The Office of the Superintendent of Financial Institutions' (OSFI) new capital guideline, the Life Insurance Capital Adequacy Test (LICAT), will replace the current MCCSR framework beginning in 2018. The LICAT guideline is not expected to increase the amount of capital in the industry compared to the current MCCSR framework. Fitch believes the reduced exposure to interest rates and equity markets in SLF's liability profile following the sale of its U.S. VA and certain individual insurance businesses could diminish the impact.

RATING SENSITIVITIES

The key rating triggers that could result in an upgrade include:

--Consistent maintenance of fixed-charge coverage, excluding the net impact of market factors, of over 10x;

--Sustained improvement in underlying and reported profitability with a ROE maintained above 12%;

--Stable balance sheet fundamentals evidenced by an MCCSR ratio at or above 220% and financial leverage below 20%.

The key rating triggers that could result in a downgrade include:

--A decline in fixed-charge coverage, excluding the net impact of market factors, to below 6x;

--A sustained drop in the company's risk-adjusted capital position, including the MCCSR ratio falling below 200%;

--An increase in financial leverage to over 25% or an increase in total leverage to over 35%;

--A large acquisition that involves execution and integration risk or impacts the company's leverage and capitalization.

Fitch has affirmed the following ratings with a Stable Outlook:

Sun Life Financial, Inc.

--Long-Term Issuer Default Rating (IDR) at 'A';

--5.7% senior notes due 2019 at 'A-';

--4.57% senior notes due 2021 at 'A-';

--4.38% subordinated debentures due 2022 at 'BBB+';

--5.59% subordinated debentures due 2023 at 'BBB+';

--2.77% subordinated debentures due 2024 at 'BBB+';

--2.60% subordinated debentures due 2025 at 'BBB+';

--3.10% subordinated debentures due 2026 'BBB+';

--5.4% subordinated debentures due 2042 at 'BBB+';

--4.75% noncumulative preferred shares, series 1, at 'BBB-';

--4.8% noncumulative preferred shares, series 2, at 'BBB-';

--4.45% noncumulative preferred shares, series 3, at 'BBB-';

--4.45% noncumulative preferred shares, series 4, at 'BBB-';

--4.5% noncumulative preferred shares, series 5, at 'BBB-';

--2.275% noncumulative preference shares series 8R, at 'BBB-';

--2.075% (floating rate) noncumulative preference shares series 9QR, at 'BBB-';

--3.9% noncumulative preference shares series 10R, at 'BBB-';

--4.25% noncumulative preference shares series 12R at 'BBB-'.

Sun Life Assurance Co. of Canada

--IFS ratings at 'AA-';

--Long-Term IDR at 'A+';

--6.30% subordinated notes due 2028 at 'A'.

Sun Life Capital Trust

--Sun Life ExchangEable Capital Securities (SLEECS), 7.093% series B, at 'A-';

--Sun Life ExchangEable Capital Securities (SLEECS), 5.863% Series 2009-1, at 'A-'.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Insurance Rating Methodology (pub. 17 May 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=881564

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1009139

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1009139

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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