Sun Life Financial Inc. and its affiliates have got a downgrade from the debt rating agency Moody’s Investors Service, just a day after the U.S. Federal Reserve made a pledge to keep the interest rates low right through 2014. Moody’s stated that the outlook on ratings of SLF as well as its US and Canadian affiliates was negative.
Sometime last month, Sun Life had decided to withdraw from selling fresh life insurance policies as well as variable annuities in the US. This change in strategy is because of the fact that insurance providers are trying to adapt to the low interest rates that have prevailed for a prolonged period of time and also due to the volatility in the stock markets.
Insurance companies are now trying to shift focus onto products that offer better returns. Laura Bazer, Vice President & senior credit officer, Moody’s Investors Service, has stated that they viewed Sun Life U.S. as a ‘non-core run off operation’ due to the decline of its market presence in the US as a result of ‘termination of new businesses and ‘gradual runoff overtime’ of its variable annuity (VA), fixed annuity, as well as other institutional liabilities. Moody’s has stated that this decision may have a positive impact for the remainder of the operation in the long term, despite getting a negative for credit profile of US operations after being downgraded from A3 to Baa2.
David Beattie, Vice President, Moody’s stated that the shutting down of the new VA sales would have serious and far-reaching implications with regard to the equity market and the ‘interest rate sensitivity’ inherent in VA products.
Moody’s has lowered the preferred rating of Sun Life from Baa2 to Baa3, reflecting a widening of the 3-notch differential, which had existed previously between the rating of ‘insurer’s Canadian operations’ and Sun Life’s ‘implied senior debt rating.’ According to Moody’s the widening gap was due to ‘weakening of the Sun Life’s credit profile’ as well as its affiliates in Asia and UK.
Added to this, Sun Life’s financial flexibility seems to have diminished as a result of significant accounting charges that were taken in 2011, which was primarily associated with the Sun Life US business. Due to this, SLF’s capital has been reduced, its financial leverage has increased, and the ‘debt service coverage ratio’ has decreased, stated Moody’s.
Moody’s also added that the negative outlook for SLF reflected the concerns regarding execution risks and runoff strategy for US businesses.
