Standard & Poor’s Ratings Services has rated Sun Life Financial Inc.’s issuance of up to $325 million of preferred shares as ‘P1-(Low)’, and affirmed its existing ratings and positive outlook on Sun Life Financial.

The proceeds from these new preferred shares and the $400 million preferred share issue that was completed in February 2005 may be used to redeem the $150 million in preferred shares on June 30 (originally issued by Clarica Life Insurance Co., and assumed by Sun Life Assurance Co. of Canada through amalgamation), and the $720 million in Cumulative Capital (trust preferred) securities in 2007, S&P says.

The company’s intention is to refinance the Clarica preferred shares and Cumulative Capital securities into a very strong and perpetual form of hybrid security to take advantage of the extremely low long-term Government of Canada bond rate, the rating agency explains. Long-term Government of Canada bonds are now below 5%, something that has not been seen for more than 30 years. During the interim, the proceeds will be used for general corporate purposes, it adds.

The ratings on Sun Life Financial and its affiliates reflect their very strong operating performance, business profile, and consolidated capital strength, S&P says. Partially offsetting these strengths are the strong competitive pressures that Sun Life Financial faces in its primary markets; the susceptibility of its wealth management businesses to earnings volatility given the uncertainties associated with the equity markets and interest rates; the impact of the devaluated U.S. dollar against the Canadian dollar, which is Sun Life Financial’s reporting currency; and economic and political risk associated with investments in emerging markets.

“We would expect Sun Life Financial’s operating performance to remain very strong, with the company generating a fixed-charge coverage ratio in excess of 8x, and a ROE of 12.5% in 2005 with no substantive increase in financial leverage,” it predicts. “Capital adequacy on a consolidated basis, as well as for the individual operating companies, is expected to remain very strong… In addition, revenue growth and financial leverage are expected to remain appropriate for the current ratings. The investment portfolio is expected to remain well diversified, with limited erosion in credit quality.”

The positive outlook on Sun Life Financial reflects the increased divergence in income streams to the holding company following the corporate destacking in January 2005, and lighter regulation and lower capital requirements for the asset management businesses and other non-insurance businesses, which provide the group with a higher level of financial flexibility, S&P adds. Continued traction in revenues and earnings needs to be seen in the U.S. businesses before the ratings on Sun Life Financial are raised, it notes.