Fitch Ratings has affirmed its ratings on two big Canadian life insurers, Sun Life Financial Inc. (TSX:SLF) and Great-West Lifeco Inc. (TSX:GWO).
While the rating agency didn’t alter its ratings on Sun Life (AA-, A-), it kept its outlook negative, citing the risk that its earnings will remain volatile, and that “the company may be unable to generate run-rate operating earnings and debt service capacity that is supportive of the current rating level.”
Fitch says its views the pending sale of Sun Life’s U.S. annuity business as a positive, as it “has historically been a drag on overall earnings”, and consumes a significant quantity of capital. And, it believes that the insurer’s ability to improve its earnings will depend partly on how it uses the proceeds from that sale.
The rating agency says that it expects that a significant portion of the proceeds will be used to fund acquisitions to grow its U.S. employee benefits business, Asian insurance operations, or its investment management business. Yet, it’s also concerned that an ill-timed, or poorly executed, acquisition would negatively impact operating earnings and debt service coverage. In the meantime, Fitch believes Sun Life’s earnings remain susceptible to continued low interest rates.
As for Great-West Lifeco, the outlook on its ratings (A+, AA) is stable. Fitch says it views the firm’s solid core insurance earnings performance as a positive, which reflects the company’s conservative risk appetite that results in “lower-risk product design, pricing discipline, strict asset-liability matching, and management of key earnings drivers”.
It notes that GWO’s investment performance also reflects its conservative investment policies and underwriting standards as well as its asset/liability, liquidity and investment skills; and, it says, the firm’s actuarial liabilities “are relatively insensitive to equity markets, due to the avoidance of riskier enhancements to individual segregated funds.”