S&P has placed the ratings of Sun Life Financial Inc. on "watch with negative implications," reflecting what it says is a potential loss of earnings quality and diversification at the insurer.
The rating agency’s decision contrasts with the positive reaction that many equity analysts and investors had Monday, after Sun Life’s new chief executive officer said the company would stop selling variable annuities and individual life insurance in the United States.
For its part, S&P says those moves may hurt Sun Life’s earnings quality and diversification. The rating agency will now take up to three months to evaluate the situation in detail, before deciding whether to leave Sun Life’s rating as is or lower it one notch. S&P currently gives Sun Life a single-A counterparty rating.
While getting out of the U.S. variable annuity and individual life insurance businesses will diminish Sun Life's presence in that country, S&P also noted that the decision should enable the company to allocate its capital more effectively and to businesses with a higher earnings quality.
Those are the sentiments that most analysts latched onto Monday, after CEO Dean Connor announced his strategic shakeup. (Former CEO Don Stewart retired at the end of last month.)
UBS analyst Peter Rozenberg said Sun Life’s moves “should reduce interest rate and equity sensitivities, improve capital allocation, and increase long-term growth and returns.” CIBC’s Rob Sedran called the decision to step back from the two product lines in the U.S. “a positive one for the long-term health of the company.”
And National Bank’s Peter Routledge wrote that, “Sun Life has completed an unsentimental review of all its businesses and rejected those that offer little realistic hope of producing stable earnings in excess of Sun Life’s cost of equity.
“Gone is a decade-old strategy to establish Sun Life as a major life insurer in the United States. In a single decision, the new CEO has definitely transformed an overly ambitious growth strategy in the United States into one that plays to the company’s competencies in that geography.”
Markets liked the moves Monday and sent the stock up by more than $1. Some of those gains have been erased Tuesday, falling by more than 2 per cent.
As BMO’s Tom MacKinnon wrote, “The key takeaway is Sun Life is doing everything it can to maintain its dividend, essentially by writing new business now that consumes substantially less capital.”