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As a consequence of its rating action, A.M. Best Co. has reaffirmed the investment grade ratings of Sun Life Financial Inc.
(SLF - Analyst Report
). The rating agency reiterated the insurer’s Issuer Credit Ratings (ICR) of a-, while the debt existing debt ratings were also reaffirmed.
Some of its units – Sun Life Assurance Company of Canada and Sun Life and Health Insurance Company (U.S.) witnessed the financial strength rating (FSR) and ICR of A+ and aa- respectively.
Also the rating agency affirmed the FSR of A- and ICR of “a-” of Independence Life & Annuity Company and the FSR of B++ and ICR of “bbb+” of Professional Insurance Company.
All the company ratings are of investment grade and carry a stable outlook.
The rating affirmation acknowledges a company’s niche presence in the Canadian life insurance industry. Sun Life Financial has traditionally presented a strong operating performance.
Sun Life also benefits from its diversified business profile. Though headquartered in Canada, the insurer has a significant presence in U.S. and is also growing aggressively in Asia by developing its life insurance and wealth management lines of business there.
The rating agency also acknowledges strategic steps taken by Sun Life to offload the variable annuities and Individual Life Insurance in the U.S. in order to unlock capital tied to this runoff business. The company plans to deploy the capital elsewhere to generate a higher return on equity.
A.M. Best is very optimistic on this step as it will reduce the risks faced by the company. Sun Life would rather shift its focus toward products that require lower capital and generate more predictable earnings such as mutual funds and group benefits. These include voluntary benefits where the company is targeting to earn a place amongst the top five players. The company is transforming its U.S. business to leverage its top position in Group Benefits by investing in the voluntary benefits business.
The rating agency also views favorably Sun Life’s strong capital profile with all its units maintaining sufficient risk based capital requirements.
An offsetting rating factor is the continuing low interest rate environment which presents a headwind for the company, in the form of low reinvestment yields. Also unfavorable credit and swap spread movements can lead to losses. Moreover, a substantial exposure to commercial mortgage loans, direct real estate and commercial mortgage backed securities pose risk of huge losses in case the commercial real estate market tumbles.
Moreover, while the sell off of its U.S. annuity business will reduce the company’s earnings volatility it will make the company more dependent on cash flows from its other businesses in Canada and Asia.
Financial strength and credit ratings, which intend to measure a company’s ability to meet policyholder obligations, are important factors affecting public confidence and creditworthiness of a company, and hence provide a company’s competitiveness. Securing an investment grade debt rating with a stable outlook reflects optimism about Sun Life’s future performance.
The ratings of Sun Life is expected to remain well positioned for the near to medium term. Key factors that could result in negative rating actions include deterioration in the financial strength of the company, a significant or sustained decline in its risk-adjusted capitalization or an operating performance that does not meet A.M. Best's expectations over a sustained period.
Another Canadian Life Insurer Manulife Financial Corp.
(MFC - Analyst Report
) also carries an investment grade rating from A.M. Best.
Other stocks StanCorp Financial Group Inc.
(SFG - Analyst Report
), and China Life Insurance Co.
(LFC - Analyst Report
) carry a Zacks Rank# 2 (Buy) and are worth considering.