A.M. Best Co. has downgraded its issurer credit ratings for Sun Life Financial Inc. and its subsidiaries, citing the earnings pressure the firm faces.
A.M. Best Co. has downgraded the issuer credit ratings to “aa-” from “aa” and affirmed the financial strength rating of A+ (Superior) for the core life insurance subsidiaries of Sun Life Financial Inc. (TSX:SLF), which consist of Sun Life Assurance Company of Canada, Sun Life Assurance Company of Canada, Sun Life Insurance and Annuity Company of New York and Sun Life and Health Insurance Company (U.S.). Concurrently, the rating agency has downgraded the ICR to “a-” from “a” of SLF as well as the existing debt ratings of the enterprise.
The rating agency said that the downgrade reflects Sun Life’s “reduced earnings trends given its continued exposure to equity market and interest rate sensitivity”. It notes that heightened volatility in equity markets and low interest rates have negatively impacted the insurer’s results, as demonstrated by its third quarter loss of $621 million. And, it believes that earnings could remain pressured for the group in the near term for those same reasons.
A.M. Best says that Sun Life also retains somewhat elevated exposure to real estate-linked assets through its investments in commercial mortgage loans, direct real estate and residential and commercial mortgage-backed securities. While a large portion of that real estate portfolio is underwritten in Canada, which is expected to continue to perform better than in the US, it notes that “recently there has been some deterioration in quality in the U.S. mortgage portfolio with an increase in problem loan and foreclosure activity.”
Notwithstanding the downgrade, the firm indicates that Sun Life’s current ratings reflect its strong business profile, with a top three market position in the Canadian life insurance market. It maintains a diversified revenue stream from multiple regions, profitable operations in Canada, favorable risk-adjusted capitalization and well developed and fully integrated risk management framework. It also says its operating subsidiaries remain well capitalized.
A.M. Best notes that Sun Life has a sophisticated hedging program already in place and steps continue to be taken to further reduce volatility through risk mitigation techniques, such as product redesign and de-emphasizing certain capital intensive product lines.
Given the downgrade, A.M. Best believes that the company is well positioned at its current rating level and relative to its peers for the near to medium term. Further negative rating action could occur should equity market volatility and low interest rates continue to impact earnings and capital levels or should investment impairments exceed A.M. Best’s expectations, it says.