Moody’s Investors Service has placed the U.S. subsidiary of Sun Life Financial Inc. (TSX:SLF) on review for possible downgrade following Tuesday’s surprise third quarter earnings pre-announcement.
The rating agency also affirmed its Aa3 rating on Sun Life’s Canadian subsidiary, Sun Life Assurance Company of Canada, and the ratings of its other Canadian affiliates, but changed the outlook to negative from stable. The rating actions follow Sun Life’s pre-announcement of a $621 million loss for the third quarter, and a further estimated $500 million reduction in fourth quarter consolidated net income, Moody’s said.
Commenting on the review for possible downgrade of Sun Life US, Moody’s said that the pre-release of the insurer’s earnings, announcing sizable consolidated operating and net losses, was largely related to the interest rate and equity market sensitivity of its US business, and the $500 million charge in the fourth quarter is also largely related to the US operations.
“Sun Life US had been experiencing persistent earnings weakness and volatility over multiple quarters due to its equity market exposure and emphasis on variable annuity sales. Despite hedging programs, earnings volatility and potential economic losses related to interest rate and equity market sensitivity continues to be a credit concern,” said Moody’s vice president, David Beattie.
The review will focus on the full third quarter results when they are released, operating results under various accounting regimes, capital adequacy, financial flexibility and the prospects for stable and sustainable future profitability at Sun Life US, it said.
Moody’s stated that the change in the outlook to negative for the Canadian operations reflects the group’s diminished full-year consolidated profitability as a result of these charges and anticipated continued drag on earnings from Sun Life US, as well as weaker financial flexibility due to capital charges and the potential need to maintain higher than historical levels of capital to support the U.S. operations.