Fitch Affirms Sun Life Financial Inc.'s Ratings; Outlook Stable

Fitch Ratings has affirmed the ratings of Sun Life Financial Inc. (TSE, NYSE: SLF) including all outstanding issues, as well as the Insurer Financial Strength (IFS) ratings of SLF's primary Canadian insurance subsidiary, Sun Life Assurance Co. of Canada (SLAC), at 'AA-'. A full list of ratings follows at the end of this release. The Rating Outlook is Stable.

KEY RATING DRIVERS

Fitch's rationale for the ratings reflects SLF's improved earnings and operating profile, strong capitalization, disciplined investment strategies that have resulted in strong liquidity and solid asset quality, the company's leading market position in Canada, growth prospects for emerging Asian markets, and relatively stable performance in U.S. mutual funds. Offsetting these positives are the company's low, albeit improved, fixed-charge coverage and sizable common shareholder dividends.

SLF reported operating income from continuing operations of CAD454 million in the first quarter of 2014, up slightly from the same period in 2013. The net impact of market factors reduced earnings by CAD26 million which was offset by assumption changes that increased earnings by CAD40 million. While SLF has taken a number of steps to reduce earnings volatility, including increasing its interest rate hedging and exiting certain lines of business including the sale of its U.S. VA and individual life businesses, Fitch believes earnings remain susceptible to the continued challenge of low interest rates.

SLF's fixed-charge coverage (on a Canadian IFRS earnings basis based on adjusted operating earnings) has improved since 2011 but remains below rating expectations. Through the first three months of 2014, SLF had a fixed-charge coverage ratio of 7.6x, up from 6.9x in full year 2013 and 5.4x in full year 2012. Fitch expects fixed-charge coverage to continue to improve in 2014 and 2015. Favorably, under Canadian regulations, SLF has greater flexibility to upstream dividends from operating subsidiaries without regulatory approval than do most U.S. peers, which, in Fitch's view, enhances holding company liquidity.

Fitch believes that SLF is well-capitalized on a risk-adjusted basis, with a minimum continuing capital and surplus requirement (MCCSR) for SLAC of 221% at March 31, 2014. Cash at the holding company totaled CAD1.5 billion, which includes proceeds from the 2013 sale of the U.S. variable annuity and certain life insurance businesses. Their positive effects are not included in SLAC's MCCSR. Fitch's expectation is that a significant portion of the proceeds from the disposition will be used by SLF to fund acquisitions to grow its U.S. employee benefits business, Asian insurance operations, or its investment management business.

The company's strong balance sheet fundamentals also benefit from relatively low financial leverage, which was 13% at March 31, 2014. Pro forma leverage including the May 2014 issuance of CAD250 million subordinated debt and the June 2014 redemption of CAD250 million of preferred shares increases to 13.9%. The leverage increase reflects the loss of equity credit that Fitch assigned the preferred shares. Despite the increase, SLF's financial leverage is below rating expectations and that of similarly rated peers.

RATING SENSITIVITIES

The key rating triggers that could result in a downgrade include:

--A decline in fixed-charge coverage, excluding the net impact of market factors, to below 6x;

--A sustained drop in the company's risk-adjusted capital position with no plans or ability to rectify; this would include the MCCSR ratio falling below 200%;

--An increase in equity-adjusted financial leverage to over 20%;

--A large acquisition that involves execution and integration risk or impacts the company's leverage and capitalization.

The key rating triggers that could result in an upgrade include:

--Consistent maintenance of adjusted fixed-charge coverage, excluding the net impact of market factors, of over 10x;

--Stable to improving balance sheet fundamentals.

Fitch has affirmed the following ratings with a Stable Outlook:

Sun Life Financial, Inc.

--Issuer Default Rating (IDR) at 'A';

--4.8% senior notes due 2035 at 'A-';

--4.95% senior notes due 2036 at 'A-';

--5.7% senior notes due 2019 at 'A-';

--4.57% senior notes due 2021 at 'A-';

--5.4% subordinated debentures due 2042 at 'BBB+';

--5.59% subordinated debentures due 2023 at 'BBB+';

--2.77% subordinated debentures due 2024 at 'BBB+';

--4.38% subordinated debentures due 2022 at 'BBB+';

--4.75% noncumulative preferred shares, series 1, at 'BBB';

--4.8% noncumulative preferred shares, series 2, at 'BBB';

--4.45% noncumulative preferred shares, series 3, at 'BBB';

--4.45% noncumulative preferred shares, series 4, at 'BBB';

--4.5% noncumulative preferred shares, series 5, at 'BBB';

--4.35% noncumulative preference shares series 8R, at 'BBB';

--3.9% noncumulative preference shares series 10R, at 'BBB';

--4.25% noncumulative preference shares series 12R at 'BBB'.

Sun Life Assurance Co. of Canada

--IFS ratings at 'AA-';

--IDR at 'A+';

--6.30% subordinated notes due 2028 at 'A'.

Sun Life Capital Trust

--Sun Life ExchangEable Capital Securities (SLEECS), 7.093% series B, at 'A-';

--Sun Life ExchangEable Capital Securities (SLEECS), 5.863% Series 2009-1, at 'A-'.

Sun Canada Financial Company

--7.25% subordinated notes due 2015 at 'A-'.

Additional information is available at 'www.fitchratings.com'. THE ISSUER DID NOT PARTICIPATE IN THE RATING PROCESS, OR PROVIDE ADDITIONAL INFORMATION, BEYOND THE ISSUER'S AVAILABLE PUBLIC DISCLOSURE.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', November 2013.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=840932

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