Fitch Ratings has affirmed its ratings on Sun Life Financial Inc. (TSX:SLF) at ‘AA-‘, but is maintaining its negative outlook on the company, citing its ongoing earnings volatility.
The rating agency affirmed its existing ratings on the insurer Tuesday, saying that the move reflects Sun Life’s strong capitalization, disciplined investment strategies that have resulted in strong liquidity and solid asset quality, the company’s leading market position in Canada, growth prospects for emerging Asian markets, and relatively stable performance in U.S. mutual funds.
“Offsetting these positives are the company’s higher levels of operating debt issued from the parent company than many peers, low debt service capacity and sizable common shareholder dividends,” it says; adding that it has a negative rating outlook on the company overall, and the firm’s U.S. life insurance subsidiaries remain on rating watch negative too. “The negative outlook reflects the historical volatility in SLF’s earnings and the possibility it may continue at run-rate operating earnings and debt service that is not supportive of the current rating level,” it says.
Fitch notes that it believes Sun Life’s ability to improve its run-rate operating earnings will depend in part on how the company deploys the proceeds from the pending sale of Sun Life Assurance Company of Canada (U.S.) and Sun Life Insurance & Annuity Co. of New York to Delaware Life Holdings; the firms that contain its U.S. variable annuity business and certain life insurance businesses that have been a drag on overall earnings and a significant consumer of capital.
While the sale has been delayed due to regulatory review, Fitch says it expects that it will be successfully completed. And, once the deal is done, it suggests that a significant portion of the proceeds will be used to fund acquisitions to grow Sun Life’s U.S. employee benefits business, Asian insurance operations, or its investment management business.
“Currently, SLF’s U.S. employee benefits business and Asian operations are not yet significant contributors to overall profitability, so well-executed acquisitions could improve the company’s earnings diversification,” it says. “However, Fitch’s primary concern is that an ill-timed or poorly executed acquisition would negatively impact operating earnings and debt service coverage.”
Additionally, it notes that while Sun Life has taken a number of steps to improve profitability, including increasing its interest rate hedging and exiting certain lines of business, Fitch believes earnings remain susceptible to continued low interest rates.