The Sun Life building in downtown Montreal.
Moody's has downgraded the debt of Sun Life Financial Inc.'s U.S. subsidiary, despite major actions the insurer's new CEO is taking to decrease its risks south of the border.
The rating agency says its decision reflects the weakened intrinsic credit profile of the U.S. business, and the fact that its sizable book of variable annuity liabilities make both earnings and capital levels volatile.
Moody's had signalled in October that it was contemplating this move, but it is nonetheless a bit of a blow for Dean Connor, who became CEO of Sun Life in December and almost immediately announced that the company would be shrinking its U.S. operations (by halting sales of individual life insurance and variable-rate annuities).
His announcement was generally positively received by equity analysts, but the rating agencies ... not so much.
Mr. Connor's actions will stop new variable annuity risk from accumulating, but it won't eliminate the risk of losses on the portfolio Sun Life has already accumulated, said Moody's vice president Laura Bazer.
"We now view Sun Life U.S. as a non-core, runoff operation, with the decline of its U.S. market presence given the termination of new business and the gradual runoff over time of its VA, fixed annuity, and other institutional liabilities," she added in the rating agency's note on the downgrade.
In December S&P put Sun Life's rating on watch with negative implications, reflected what it said was a potential loss of earnings quality and diversification at the insurer as a result of Mr. Connor's changes. S&P said it would take up to three months to evaluate the situation before making a decision.