DBRS Ltd. has placed its ratings on Sun Life Financial Inc. under review, citing its weak and volatile earnings performance, and strategic uncertainty.
The rating agency said on Friday that its ratings on Sun Life’s debt are under review with negative implications, due to the company’s, “recent weak profitability and earnings volatility associated with exogenous market factors over the past several years.”
It notes that the issues are not unique to Sun Life, but that following a review of the industry, it views the insurer’s current ratings as “being out of alignment” with its recent earnings track record, and the ratings of its peers.
DBRS adds that the ratings move also reflects “uncertainty associated with the company’s strategic transition as it attempts to restore profitability and earnings stability by pursuing more profitable products with fewer embedded risks and lower capital requirements.” It says that Sun Life faces a number of challenges to this, including execution risk, the weak economic and interest rate environment, and ongoing regulatory and accounting reforms.
“The strength of the company’s Canadian franchise, a growing appetite for its products and services, a reasonable level of diversification in attractive market niches in the United States and Asia, and conservative risk management are nevertheless not sufficient for Sun Life to maintain its current ratings in the absence of a recovery in core earnings and reduced earnings volatility,” it says.
DBRS says that it intends to conclude the ratings review within the next few months, following its annual review with the company’s management team.
At the same time, DBRS also confirmed its existing ratings on Sun Life rivals, Manulife Financial Corp., Great-West Lifeco Inc., and Industrial Alliance Insurance and Financial Services Inc. (IAG).
However, it did assign a negative trend to IAG’s ratings, noting the company’s “reduced financial flexibility as it has continued to shore up its regulatory capital ratios through the issuance of additional preferred shares.”
Resolving the negative rating trend on IAG, “hinges to some degree on a return to a more sustainable interest rate environment which would take away some of the overhanging downward pressure on earnings”, the rating agency explains.
It says that the company could face a downgrade if earnings start to be negatively affected over the next 12 months by low interest rates, or by deterioration in top-line growth following recent strategic decisions (such as the decision to stop selling segregated funds with the Guaranteed Minimum Withdrawal Benefit feature). Conversely, it says a sustained improvement in profitability would return the trend to stable.