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

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of Sun Life Financial Inc. (TSE, NYSE: SLF) including all outstanding issues, 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

Fitch's rationale for the ratings reflects SLF's improved earnings and operating profile, strong capitalization, disciplined investment strategies that have resulted in strong liquidity and solid asset quality. The ratings also reflect the company's leading market position in Canada, growth prospects for emerging Asian markets, and growing asset management business. Offsetting factors include the company's low, albeit improved, fixed-charge coverage.

SLF reported operating income from continuing operations of CAD1.4 billion during the first nine months of 2014, an 8% increase over the prior year period. The net impact of market factors reduced earnings by CAD102 million which was somewhat offset by assumption changes that increased earnings by CAD55 million. SLF has taken a number of steps to reduce earnings volatility, including the sale of its U.S. variable annuity and certain life insurance businesses, as well as increasing its interest rate hedging. However, Fitch believes the company's earnings remain susceptible to a continued low interest rate environment.

Fitch believes that SLF is well-capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) for SLAC of 218% at Sept. 30, 2014. The company's strong balance sheet fundamentals also benefit from modest financial leverage of 13.5% at Sept. 30, 2014, which is better than rating expectations and that of similarly rated peers. The company's total financing and commitments (TFC) ratio, which includes operating debt, was 0.9x excluding goodwill as of Sept. 30, 2014, which is considered neutral to its rating.

SLF's fixed-charge coverage, excluding the net impact of market factors and assumption changes, has improved to 8.1x as of Sept. 30, 2014 compared with 6.0x for full-year 2013. Despite improved results, the company's coverage metrics remain below rating expectations. Favorably, under Canadian regulations, SLF has greater flexibility to upstream dividends from operating subsidiaries without regulatory approval than do most U.S. peers, which, in Fitch's view, enhances holding company liquidity. Additionally, MFS provides a source of unregulated cash flow to the holding company.

Cash at the holding company totaled CAD1.7 billion as of Sept. 30, 2014, compared with a run-rate level of CAD800 million. Fitch expects that a significant portion of the excess holding company cash proceeds from the disposition will be used to fund acquisitions to grow its U.S. employee benefits business, Asian insurance operations including its acquisition in Malaysia, and/or its investment management business.

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.

Despite continued growth in assets under management through the first nine months of 2014, MFS reported negative net sales of $2 billion (redemptions exceeded gross sales) in the third quarter. MFS lost assets to client rebalancing and the closing of one of its funds. Additionally, MFS' retail fund performance slid during the first nine months of 2014 with 76% and 71% of retail fund assets ranked in the top half of their respective Lipper categories based on three- and five-year performance at Sept. 30, 2014. This compares with 92% and 73% respectively at Dec. 31, 2013.

RATING SENSITIVITIES

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 with no plans or ability to rectify; this would include 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.

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;

--Continued improvement in profitability on an underlying and reported basis;

--Stable to improving balance sheet fundamentals.

Fitch has affirmed the following ratings with a Stable Outlook:

Sun Life Financial, Inc.

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

--4.8% senior notes due 2035 at 'A-';

--4.95% senior notes due 2036 at 'A-';

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

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

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

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

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

--4.38% subordinated debentures due 2022 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';

--4.35% noncumulative preference shares series 8R, 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-';

--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-'.

Sun Canada Financial Company

--7.25% subordinated notes due 2015 at 'A-'.

Additional information is available at 'www.fitchratings.com'. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', September 2014.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=978696

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