Moody’s is considering downgrading the debt of Sun Life Financial Inc.’s U.S. subsidiary, and is more pessimistic about the Canadian insurer’s rating, following Sun Life’s surprising announcement that it expects to lose $621-million in the third-quarter.
While the rating agency affirmed Sun Life’s main Aa3 rating, it shifted its outlook on the company to "negative" from "stable" on Tuesday evening.
“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,” said Moody’s vice-president David Beattie. “Despite hedging programs, earnings volatility and potential economic losses related to interest rate and equity market sensitivity continues to be a credit concern.”
As for the parent company’s rating, Moody’s said its negative outlook reflects the insurer’s diminished full-year profitability, and its anticipation that Sun Life’s U.S. business will continue to drag down earnings. The rating agency is also concerned that capital charges and the potential need to maintain unusually high levels of capital to support its U.S. operations will result in weaker financial flexibility.
The agency’s comments highlight both the toll that low interest rates are continuing to take on the life insurers, as well as the headaches that their U.S. businesses pose. Manulife Financial has been working to aggressively shrink its U.S. variable annuity sales, reducing them by more than two-thirds, but it still faces calls from some critics to spin off its U.S. business, John Hancock, entirely and concentrate on its growing operations in Asia, which show much more potential.