Moody’s Investors Service has downgraded Sun Life Financial’s U.S. operating subsidiary due to its reduced significance to the firm.
The rating agency said that the downgrade of Sun Life US, “reflects its weakened intrinsic credit profile, due to the run-off status of the company after and the inherent economic earnings and capital volatility associated with its sizable inforce book of variable annuity liabilities.” Last month, Sun Life Financial Inc. (TSX:SLF) said that it would stop selling variable annuities in the U.S.
The downgrade also reflects Moody’s view of Sun Life’s more limited commitment to Sun Life US’ business. “We now view Sun Life US as a non-core, runoff operation, with the decline of its US market presence given the termination of new business and the gradual runoff over time of its VA, fixed annuity, and other institutional liabilities,” said Laura Bazer, vice president and senior credit officer.
“While the cessation of new VA sales ends the accumulation of new VA risk, it does not eliminate the risk of future losses on the inforce block if policyholder behavior deteriorates relative to reserve assumptions, or if equity market declines and continued low interest rates are not fully offset by hedging,” she adds. Also, Sun Life US will also face the challenge of managing expense reductions as the operation shrinks.
Moody’s also affirmed its ratings on the firm’s Canadian operations, which it said that is based on the company’s top-three market position in Canada, strong product risk and diversification, strong and predictable Canadian earnings, and solid capitalization.
“While negative for the credit profile of the U.S. operations, we view the discontinuation of U.S. VA sales as potentially having longer term positive implications for SLF and SLA,” said Moody’s vice president, David Beattie. “The shutdown of new VA sales will limit future growth of the organization’s exposure to the chronically poor earnings performance of the U.S. subsidiary, as well as to the equity market and interest rate sensitivity inherent in its VA products.”
Moody’s also maintains a negative outlook for the entire Sun Life group. The rating agency noted its concerns related to the execution risks of the runoff strategy for the U.S. businesses and that any further charges arising from Sun Life US’ and the U.S. branch’s closed blocks would remain a drag on the company’s consolidated earnings.
“This strategy is not without execution risk, however, and waiting to see at least a few quarters of experience before addressing the outlook for the organization as a whole is appropriate at this time”, Beattie added.
It also notes that there is uncertainty about the timing for Sun Life to lower its currently elevated financial leverage, as well as future capital releases from Sun Life US, and the profitability of the remaining employee benefits and voluntary product businesses at the U.S. branch, now that its life insurance business and the U.S. subsidiary’s operations are in run-off.