Fitch Ratings has affirmed the existing ratings assigned to Sun Life Financial (SLF) (Issuer Default Rating [IDR] at A+) and its operating subsidiary Sun Life Assurance Company of Canada (SLA; Insurer Financial Strength Rating at AA).

Additionally, Fitch has assigned an 'A-' long-term rating to SLF's CAD650 million series 2022-1 4.78% fixed to floating subordinated unsecured notes. The Rating Outlook is Stable.

SLF's new subordinated unsecured notes are rated two notches below the company's 'A+' Long-Term IDR, which reflects Fitch's assumption of 'poor' recovery prospects in the event of default, given the level of subordination and zero notches for 'minimal' non-performance risk. The rating assigned to the new issuances is equivalent to the rating on SLF's existing subordinated debt.

Key Rating Drivers

Favorable Business Profile: Sun Life Financial Inc.'s (SLF) very strong and diversified business profile is supported by its international operations, which include life insurance, group benefit, group retirement services and asset management. Furthermore, the company maintains market leadership across a number of these offerings, with a lower overall degree of exposure to riskier legacy liabilities, such as universal life with secondary guarantees.

Very Strong Capitalization Metrics: SLF's capitalization metrics are assessed as being very strong, offset in part by the company's relatively higher degree of exposure to goodwill and intangible assets, which represented 38% of shareholders' equity at YE 2021. SLF's 9M22 reported regulatory capital ratios continue to remain within Fitch's rating expectations, reporting a Canadian regulatory capital ratio at SLA of 123%, and a life insurance capital adequacy test ratio of 129% at the holding company level.

Stable Financial Performance: Fitch views SLF's financial performance favorably, consistently reporting operating ROE metrics in line with 'aa' rating guidelines. The company's third quarter results were impacted by some weakness in the asset management segment, but underlying net income was up modestly over the first nine months as compared to 2021 and SLF reported an underlying ROE of 14.9%. We expect the company's performance to continue to remain very strong, reporting ROE metrics that are broadly supportive of the company's rating.

Moderate Financial Leverage: SLF's financial leverage moved up slightly to 21% at 3Q22 following the close of its acquisition of DentaQuest, but remained in line with peers and Fitch's guidelines. Additionally, the company issued CAD650 million of subordinated unsecured debentures in August while also announcing in September its intention to redeem CAD400 million of its 2017-1 subordinated unsecured debentures. SLF's leverage and overall debt-servicing capabilities remain very strong.

Very Strong Coverage and Liquidity: As of YE 2021, fixed-charge coverage was 21x, and SLF's holding company liquidity and access to capital markets are viewed as stable, with access to varied sources of funding that favorably affects our financial flexibility analysis.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

Improvement in the company's competitive positioning in the U.S. and Asia, increasing the company's overall operating scale and degree of diversification across its businesses, while maintaining very strong capitalization metrics;

Reduced exposure associated with legacy related liabilities that strain capital and earnings;

Fixed-charge coverage metrics consistently in excess of 15x, along with financial leverage and total leverage metrics below 15% and 25%, respectively.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

Significant deterioration in the company's investment and/or operating performance caused by underwriting losses or increased impairment activity that adversely impacts capital formation;

A material shift in underlying net income associated with wealth and asset management operations;

Fixed-charge coverage metrics consistently below 6x, along with financial leverage and total leverage to consistently above 25% or above 35%, respectively;

Deviation from its current risk profile by expanding into inherently riskier products and asset classes.

Best/Worst Case Rating Scenario

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.

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