Stewart McIlwraith, CFA

Transcription

1 Rating Report Sun Life Financial Inc. and Affiliates Ratings Stewart McIlwraith, CFA Komal Rizvi, ASA Issuer Obligation Rating Rating Action Trend Sun Life Assurance Company of Canada Financial Strength Rating AA (low) Confirmed Stable Sun Life Financial Inc. Issuer Rating A Confirmed Stable *A complete list of the rated debt instruments appears on the last page of this report. Rating Update and Rationale On December 13, 2017, DBRS Limited (DBRS) confirmed Sun Life Financial Inc. s (SLF or the Company) Issuer Rating and Senior Unsecured Debentures rating at A, as well as its Subordinated Unsecured Debentures rating at A (low) and Preferred Shares rating at Pfd-2. DBRS also confirmed Sun Life Assurance Company of Canada s (Sun Life Assurance) Financial Strength Rating and Issuer Rating at AA (low), as well as its Subordinated Debt rating at A (high). At the same time, DBRS confirmed Sun Life Capital Trust s SLEECS Series B rating and Sun Life Capital Trust II s SLEECS Series rating at A. All trends are Stable. In confirming these ratings, DBRS considered the Company s excellent franchise, which reflects its position among the top three insurance and financial services companies in Canada. SLF has extensive insurance and wealth management operations in Canada, the United States and multiple countries in Asia. Earnings are well-diversified as the Company operates through a four-pillar strategy, where it aims to become a market leader in the segments that it operates in namely, Canada, the United States, Asia and Asset Management. The Company is a market leader in Canada in all the segments it operates in, including group and individual insurance, as well as wealth and asset management. The Company is effectively employing a client-centric strategy, using digital technology to increase client engagement and satisfaction. In the United States, SLF has good market presence in various segments of the group insurance market, along with good market share, offering life insurance solutions to high-net-worth international clients. (Continued on page 2.) Financial Information 9 Mos. to Sept YE2016 YE2015 YE2014 YE2013 YE2012 Net premium income 11,203 10,629 15,048 10,395 9,996 9,639 8,247 Fee income 4,322 4,138 5,580 5,324 4,453 3,716 3,028 Return on equity 13.0% 12.2% 12.8% 12.3% 11.3% 11.8% 10.2% Total debt, hybrids and 5,993 6,790 6,791 5,446 5,122 5,602 5,939 preferred shares Financial leverage ratio 22.5% 25.6% 25.2% 22.1% 23.6% 27.4% 29.7% Fixed charge coverage ratio 10.5X 9.5X 10.0X 9.3X 7.2X 3.9X 5.4X Issuer Description Sun Life Financial Inc. is one of the largest financial services companies based in Canada, with $934 billion of assets under management (AUM) as at September 30, Its major operating subsidiary, Sun Life Assurance Company of Canada, provides financial protection products in Canada, the United States and Asia, including life and health insurance for individuals and groups. A second subsidiary, Sun Life Global Investments Inc., houses wealth management operations, such as mutual fund and institutional investment management, largely conducted by two subsidiaries: MFS Investment Management (94% owned) and Sun Life Investment Management Inc. (SLIM).

2 Rating Report Sun Life Financial Inc. DBRS.COM 2 Rating Update and Rationale (Continued from Page 1) The Company s major U.S. asset management subsidiary, Massachusetts Financial Services (MFS), has sizable AUM ($591 billion as at Q3 2017) and demonstrated good fund performance and stable fee income, even as net sales remain negative in the current challenging operating environment for mutual fund managers. SLF is strengthening its distribution channels in Asia, where it operates in seven countries, providing life insurance and wealth management solutions. The Company has demonstrated good growth in insurance and wealth sales in Asia. This geographical segment presents an opportunity for higher growth and potentially significant product sales, especially considering the mature and well-saturated insurance markets of North America. The business model is well-diversified. Recent acquisitions, including Bentall Kennedy (a real estate asset management firm) in 2015 and Assurant, Inc. s group benefits business in the United States in 2016, are in line with the Company s focus on pursuing higher-growth, lower-risk opportunities. In recent years, SLF has increased its ownership positions in its Asian insurance operations and strengthened its distribution capabilities in Asia. The Company s comprehensive and well-developed enterprise risk management framework guides strategic decision making, with SLF aiming to deploy its excess capital in areas that are aligned with its strategy of growing business lines, which are generally less capital intensive and less exposed to market risk. The Company s efforts to de-risk its portfolio are viewed positively by DBRS; however, DBRS is cognizant of the fact that risks pertaining to large blocks of legacy businesses remain on the Company s balance sheet as a result of its runoff blocks of life insurance business in the United States. As indicated by its leverage ratio of 22.5% (Q3 2017) and Sun Life Assurance s minimum continuing capital and surplus requirements (MCCSR) ratio of 232% (Q3 2017), the Company has good capitalization and asset quality. The Company s fixed-charge coverage ratio improved to 10.5 times at 9M 2017, as earnings remain more stable than they have in the past. SLF demonstrated a good overall return on equity (ROE) value of 13.0% for 9M 2017, in line with its stated ROE target of 12% to 14% in the medium term. The Company s welldiversified operations allow for stability in earnings, even as some businesses may face challenges (for example, the Company s U.S. runoff life insurance block experiencing adverse policyholder experience in 2017). SLF has a conservative invested assets profile, even as its exposure to BBB and lower-rated bonds and corporate loans (29.4% at Q3 2017) is higher than peers. The Company has sizable cash reserves (approximately $1.5 billion as at Q3 2017) at the holding company level, providing an additional cushion in an adverse event scenario. High capital levels place SLF in a good position to deal with changes in the regulatory environment, including the replacement of the current MCCSR guideline by the Life Insurance Capital Adequacy Test in The Company s hedging programs help to mitigate any volatility in earnings and regulatory ratios that may arise from adverse movements in equity markets or interest rates. The Stable trend considers the Company s resilient fundamentals and its ability to adapt to the current challenging economic environment. Recent Developments On November 23, 2017, SLF completed its offering of $400 million of 2.75% subordinated debentures due On September 7, 2017, the Company announced its agreement to acquire Excel Funds Management Inc. and Excel Investment Counsel Inc. (Excel Funds), an emerging markets asset manager with about $700 million of AUM. The Company redeemed $800 million of 4.38% subordinated debentures on March 2, On September 19, 2016, the Company completed an issuance of $1.0 billion of 3.05% subordinated debentures due On August 3, 2016, the Company announced its intention to acquire the pension businesses of FWD Hong Kong. The Company also announced its intention to enter into an exclusive 15-year distribution agreement with FWD, allowing Sun Life Hong Kong to distribute pension products, including the Mandatory Provident Fund (MPF) retirement product, through FWD s agency force in Hong Kong. On March 1, 2016, the Company completed its acquisition of Assurant, Inc. s Employee Benefits business for USD 975 million, making it the sixth-largest group benefits business in the United States.

3 Rating Report Sun Life Financial Inc. DBRS.COM 3 Rating Considerations Strengths Broad diversification of products, markets and distribution channels. Strong Canadian franchise. Comprehensive risk management framework. High capital levels. Challenges Managing integration risks of recent acquisitions. Achieving sustained business and revenue growth across various business lines. Managing the insurance and market risks associated with runoff businesses. Rating Drivers Factors with Positive Rating Implications Demonstration of continued benefits from clientcentric strategy and significant progress in achieving strategic goals with its international expansion, combined with solid earnings performance and growth, consistently improved financial metrics and asset quality and income stability across all of its various business lines. Factors with Negative Rating Implications Significant increase in financial leverage. Deterioration in asset quality. Persistent weakness in the Canadian business and profits. Sustained adverse reserve development caused by poor experience relative to assumptions. Reduced free cash flow from MFS and a weakened outlook.

4 Rating Report Sun Life Financial Inc. DBRS.COM 4 Simplified Corporate Organizational Chart (September 30, 2017) Sun Life Capital Trust SLEECS Series B "A" Sun Life Capital Trust II SLEECS Series "A" Sun Life and Health Insurance Company (U.S) Sun Life Assurance Company of Canada (U.K.) Limited (England and Wales; Runoff) Sun Life Everbright Life Insurance Company Limited (China; 25%) Sun Life Assurance Company of Canada Financial Strength Rating: AA (low) Sun Life Hong Kong (Bermuda) Sun Life Malaysia Assurance Berhad (49%) Sun Life Assurance Company of Canada (U.S. Branch) Sun Life Takaful Berhad (49%) Sun Life Financial Inc. (SLF) Issuer Rating: "A" PVI Sun Life Insurance Company Limited (Vietnam; 100%) PT Sun Life Financial Indonesia Sun Life of Canada (Philippines) Birla Sun Life Insurance Company Limited (India; 49%) Massachusetts Financial Services Company (MFS; 94%) MFS Investment Management Canada Limited Indicates ownership Sun Life Global Investments Inc. (SLGI) Indicates branch relationship Independence Life & Annuity Company Bentall Kennedy Sun Life Assurance Company of Canada - U.S. Operations Holdings Inc. Prime Advisors Ryan Labs

5 Rating Report Sun Life Financial Inc. DBRS.COM 5 Franchise Strength SLF has excellent franchise strength, with operations that are well-diversified by product, geography and distribution channel. The Company is one of Canada s oldest and largest (third largest by total assets) life insurance companies, with general fund assets of $158.8 billion, segregated funds of $102.2 billion and other funds managed (mutual funds and managed institutional funds minus consolidation adjustments) of $672.6 billion as at September 30, Segregated fund assets and mutual fund assets comprise 11.0% and 35.2% of total AUM, respectively. The Company provides life insurance and wealth management products and services for both individuals and groups in Canada, the United States and multiple countries in Asia. In order to better leverage its product capabilities and to manage operational complexity, the Company centralizes some of its areas of expertise, such as asset management and actuarial. The intention is that best practices can be easily transferred even where an individual business segment may not have the scale required to develop such expertise. SLF is focusing on its four-pillar strategy, including building on the Company s leadership in employee benefits, insurance and wealth management in Canada; concentrating on employee benefits, including voluntary benefits, and life insurance for high-net-worth clients in the United States; realizing growth potential and increasing scale in Asia; and growing its asset management businesses, both organically and by acquisition. The Company s current strategy is to refine its product offerings to assume fewer market risks, such as exposures to interest rate and equity markets through long-duration guarantees, thereby reducing its regulatory capital requirements while increasing more stable fee-based revenues. The Company s operations are segmented as follows: (1) Sun Life Financial Canada offers individual life and health insurance; group life and health insurance; wealth management products, such as mutual funds and segregated funds; and pension fund administration. Representing over one-third of the Company s earnings, the Canadian operations form a solid platform for earnings and cashflow. As one of the three largest competitors in the Canadian industry, the Company s major operating subsidiary, SLA, is a leader in each of its business segments. It has the scale and market presence to provide a distribution and service cost advantage, especially with respect to web-based client services across the group protection and wealth management lines of business. A weakening of its position in Canada, resulting in loss of market share, would be a negative ratings influence given the large proportion of earnings generated from the Canadian operations. The Company has a large captive agency sales force in Canada, with approximately 4,000 agents. While the Sun Life brand has one of the larger exclusive sales forces in the Canadian industry, the Company is increasing its use of wholesale distribution in Canada to broaden its market coverage to include investment dealers and MGAs. Individual life and investment products in Canada are sold by a dedicated sales force, complemented by growing wholesale distribution channels. Group products are sold through a group field force, as well as through insurance brokers, consultants and managing general agencies. The Company has its own line of mutual funds provided by Sun Life Global Investments (Canada) Inc., with fund management provided by MFS and other third-party subadvisors. In 2017, the Company acquired Excel Funds, an emerging markets fund manager with $700 million in AUM, to accelerate growth and increase scale. While sales of mutual funds are still modest and the industry as a whole is facing competitive pressures and a downward trend in fees, the Company sees good potential to capture more third-party mutual funds sold through its distribution channels and to sell an investment product that does not directly expose the Company to equity market risk (other than through asset-based fees). (2) Sun Life Financial U.S. After selling its U.S. annuity business in 2013 because of concerns over the amount of capital required to support the liabilities and the income volatility it generated, and to reduce its risk profile, the Company has instead focused on employee benefits, which, by nature of the short duration and flexibility in repricing, represents an attractive low-risk product that complements one of the Company s areas of expertise in the Canadian market. The focus on group benefits also reduces income volatility resulting from market movements in equity values and interest rates, even as margins remain challenged partially because of elevated expenses and adverse disability experience. The Company s acquisition of Assurant s Employee Benefits segment in 2016 resulted in providing a material boost to the Company s presence in the Group Benefits business, with this segment now comprising a complete suite of group products, including life and disability, medical stop-loss, dental and vision (where it has the number-two proprietary dental network in the United States) and voluntary benefits. Sun Life Financial U.S. also has an International business where it focuses on the life insurance needs of high-net-worth life clients residing outside North America. The Company believes that this segment provides an attractive growth segment given an increase in high-net-worth assets in emerging economies, even as more players compete for market share. SLF U.S. also has an individual life (including universal life) business that has been in runoff since December (3) SLF Asset Management, consisting of MFS and SLIM, is SLF s mutual fund and investment management subsidiary. MFS is the tenth-largest mutual fund company (by AUM as at June 30, 2017) in the United States. Combined, MFS and SLIM have a combined total of $648 billion of AUM as at September 30, 2017, with MFS comprising the vast majority (91%) of the AUM. SLF Asset Management has a global investment platform with solid long-term performance in a variety of investment management styles, including real estate investment. As at Q3 2017, the mix of AUM for MFS was well diversified between managed (including management of life insurance

6 Rating Report Sun Life Financial Inc. DBRS.COM 6 variable annuities or segregated funds) and retail mutual funds, with each segment comprising 51% and 48% respectively. Gross sales of $88.8 billion have been achieved for the year-to-date (YTD) period ending September 30, 2017, even as net sales remain negative at MFS because of a high rate of redemptions in a changing and highly competitive mutual fund industry. SLF Asset Management totalled 27.8% of the Company s 9M 2017 common shareholder net earnings, an increase from 14.9% in 2013, although this contribution may remain flat as MFS struggles to improve net flows. AUM is growing largely from fund performance. MFS is attempting to maintain its good investment performance in an effort to attract and retain clients. Fund performance is strong with 84% of its fund assets ranked in the top half of its Lipper peer category based on three-year performance as at Q MFS is investing in marketing and brand awareness and in its technology infrastructure, increasing its wholesaling capabilities on a global basis, as well as developing a fixed-income product suite and more competitively priced offerings in an effort to improve net sales. Through the SLIM subsidiary, the Company has four brands (Bentall Kennedy Group, Prime Advisors Inc., Ryan Labs Asset Management and SLIM) that manage a combined $57 billion in assets. The SLIM platform aims to provide investment solutions to institutional investors, including liability-driven and alternative fixed-income investments, as well as real estate. The asset management business segment is an important part of the Company s four-pillar enterprise strategy, providing an unrestricted source of dividends (due to the absence of regulatory capital restrictions) to the holding company, decreasing the product risk profile and increasing diversification of earnings. (4) Sun Life Asia represents an attractive growth market with good long-term earnings potential, especially in light of the mature and saturated insurance and wealth management markets of North America. The Company operates in seven countries: Hong Kong, the Philippines, Indonesia, India, China, Vietnam and Malaysia. The Company has been operating in Hong Kong for over 120 years and is a major player in Hong Kong s mandatory pension savings market, as well as its life insurance market. Similarly, SLF has been operating in the Philippines since 1895 and has since built a strong brand and agency force there. Asian life insurance sales are mainly driven by Hong Kong and the Philippines, with the other countries providing lower-but-consistent sales revenue. Additionally, the Company is in the asset management business as a strong player in the mutual fund markets in India and the Philippines and in the MPF market in Hong Kong. Distribution in Asia is more varied than in North America, with the Company utilizing bancassurance and direct channels, such as telemarketing and mobile apps, along with traditional advisors. With the build out of an agency force in Malaysia, the Company has an exclusive agent force in all seven countries that it operates in. Expansion of distribution channels is key to the Company s future success. The Company continues to expand its career agencies and its bancassurance channels in Asia, as evidenced by its 15-year exclusive pension distribution deal with FWD Hong Kong, a Hong-Kong based global life insurer. Through its Asian businesses, the Company can reach over 70% of Asia s population. Organic growth opportunities, combined with reduced market opportunities in North America, mean that the Company s Asian businesses may generate an increasing percentage of the Company s revenues and earnings in the future, although Canada and the United States still generate the majority of earnings. (5) Sun Life U.K. (included in Corporate) is in runoff, but it is expected to provide a steady stream of earnings benefiting from no business development costs. In-force products include individual annuities and pensions, as well as individual life insurance totalling over 750,000 policies. Retaining qualified staff, maintaining low or declining expense growth, maintaining portfolio investment returns to meet or exceed liability assumptions, managing longevity risks, and managing capital requirements are key factors in sustaining profitability in this block. Summary of Operating Segments ($ Millions) 9 Mos. to Sept. 30, 2017 Reported Reported Shareholders Net Shareholders Net Income ($) Income (%) Revenue ($) Revenue (%) Sun Life Financial Canada % 8, % Sun Life Financial U.S % 6, % SLF Asset Management % 3, % Sun Life Asia % 2, % Corporate (Including % % Consolidation Adjustments) Total 1, % 20, %

7 Rating Report Sun Life Financial Inc. DBRS.COM 7 Reported Shareholders Net Income ($ Millions) 9 Mos. to Sept YE2016 YE2015 YE2014 YE2013 YE2012 Sun Life Financial Canada Sun Life Financial U.S SLF Asset Management Sun Life Asia Corporate (42) (184) (73) Total* 1,942 1,757 2,485 2,185 1,762 1,696 1,374 * Excludes net income (loss) from discontinued operations. (754) 180 Reported Shareholders Net Income (%) 9 Mos. to Sept YE2016 YE2015 YE2014 YE2013 YE2012 Sun Life Financial Canada 40.7% 30.6% 37.7% 37.7% 44.8% 51.8% 57.4% Sun Life Financial U.S. 17.1% 22.9% 20.4% 15.2% 19.4% 35.3% 23.4% SLF Asset Management 27.8% 30.2% 29.3% 31.6% 27.9% 14.9% 15.1% Sun Life Asia 12.5% 14.3% 12.4% 14.2% 10.3% 8.8% 9.4% Corporate 1.9% 2.0% 0.1% 1.2% -2.4% -10.8% -5.3% Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Assets under Management ($) As at Sept YE2016 YE2015 YE2014 YE2013 YE2012 General Fund Assets 158, , , , , , ,171 Segregated Fund Assets 102,237 95,386 97,167 91,440 83,938 76,141 92,655 Mutual Funds 328, , , , , , ,569 Institutional/Managed 370, , , , , , ,710 Funds Consolidation Adjustments (26,815) (25,827) (25,413) (26,054) (21,152) (17,848) (30,239) Total AUM 933, , , , , , ,866 Risk Profile SLF has a good risk profile. The excess capital on hand resulting from the sale of the U.S. annuity business has helped the Company pay for large acquisitions without incurring a high leverage ratio in the process. In Q3 2017, the Company s leverage ratio was 22.5%, a decline from the Q value of 25.6%. The Company has stayed focused on its prudent deployment of capital, focusing on acquisition activity in areas aligned with its risk appetite, such as in the asset management sphere or in the emerging markets of Asia. It has also been engaged in share buybacks and debt-redemption-related activities. SLF is patient in its acquisition strategy, with management willing to wait for deals that offer good value. The Assurant, Inc. integration is progressing well, but there remains the potential of risks arising from poorly executed integration, managing the additional volume of new clients and technology risks arising from integrating systems. SLF has a comprehensive and well-developed risk management framework, with risk management being a well-integrated component in the Company s strategic decision making. Its highly developed risk management policies and procedures, including adherence to risk limits and tolerances, have the ability to prevent the Company from writing businesses that may present undue risk, to mitigate the risks

8 Rating Report Sun Life Financial Inc. DBRS.COM 8 that it does undertake and to identify areas of growth opportunities. As an example of the Company pursuing growth in areas where it can assume more risk as identified by its risk management framework, the Company is expanding its market leadership in the defined benefit solutions pension market in Canada, where it is executing large annuity and longevity transactions, which has Sun Life Assurance assuming more long-tail longevity risk. Some of this longevity risk can be offset with death benefit mortality risk. Management strives to identify and assume risk when the risks are consistent with the Company s earnings and capital risk targets. Risks are mitigated through product design, pricing and hedging activities. Business lines and products are tested for sensitivity to changes in interest rates and equity price movements and hedged where deemed necessary to maintain risks within tolerance targets. Product pricing and design are driven by extensive risk analysis and are manufactured to mitigate these risks as much as possible while remaining competitive in chosen markets. The past few years have given the Company a good opportunity to refine and expand its risk management framework, given the continuing low level of interest rates and equity market volatility. The Company reports that it is constantly upgrading its risk management processes and systems and employs an economic capital model that it expects will result in a more efficient allocation of capital on a risk-adjusted basis. In recent years, the strategy to reduce risk in its insurance portfolio has led to the company exiting entire blocks of annuity and insurance businesses in the United States. However, in the future a continued pattern of writing unprofitable blocks of business that are then exited to mitigate losses can have negative rating implications. The resilience of the Company s earnings also reflect its proactive incorporation of its risk management capabilities into product design and pricing decisions. The Company s decision to stop writing long-tailed products in the U.S. market reflected in part its decision to reduce earnings volatility, which was having direct negative implications on available capital and the ability to meet the required levels of regulatory capital. DBRS acknowledges the degree to which the Company has acted to mitigate its market exposures. The Company s exposure to equity market and interest rate risks is tied to its product pricing and the performance guarantees embedded in many of its insurance and wealth management product liabilities, including variable universal life and segregated funds. Additionally, the Company is indirectly exposed to equity market risk through its investments in asset management businesses, such as Sun Life Asset Management and Canadian Group Retirement Services, where management fees are tied to the market valuations of AUM. The potential earnings and capital volatility in certain individual insurance products has been dampened by hedging activities that are prompted by the Company s risk management processes and procedures. Insurance and Investment Contract Liabilities, Net of Reinsurance ($ Millions) YE2016 YE2015 YE2014 YE2013 YE2012 Participating 34,090 33,900 32,414 29,560 29,056 Non-participating 78,736 73,854 67,591 58,297 57,282 Total 112, , ,005 87,857 86,338 Participating/total liabilities 30.2% 31.5% 32.4% 33.6% 33.7% Non-participating/total liabilities 69.8% 68.5% 67.6% 66.4% 66.3% Fixed Income (Public Bonds Only) Portfolio As at Sept. 30 Bonds Rated - $ Millions YE2016 YE2015 YE2014 YE2013 YE2012 AAA 12,715 12,806 12,695 12,967 11,292 9,068 8,626 AA 15,088 14,740 13,632 11,235 11,821 9,877 10,685 A 22,003 25,157 23,712 23,235 21,854 18,060 18,706 BBB 19,540 21,504 20,125 20,290 19,477 16,175 15,366 BB and below 1,216 1,832 1,723 2,169 1,770 1, Total Bonds 70,562 76,039 71,887 69,896 66,214 54,813 54,362

9 Rating Report Sun Life Financial Inc. DBRS.COM 9 As at Sept. 30 Bonds Rated - % YE2016 YE2015 YE2014 YE2013 YE2012 AAA 18.0% 16.8% 17.7% 18.6% 17.1% 16.5% 15.9% AA 21.4% 19.4% 19.0% 16.1% 17.9% 18.0% 19.7% A 31.2% 33.1% 33.0% 33.2% 33.0% 32.9% 34.4% BBB 27.7% 28.3% 28.0% 29.0% 29.4% 29.5% 28.3% BB and below 1.7% 2.4% 2.4% 3.1% 2.7% 3.0% 1.8% Total Bonds 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Earnings Ability The Company has excellent earnings ability. In recent years, the Company has been reducing risk in its insurance portfolio and focusing instead on improving its earning and risk profile through disciplined acquisitions. With large amounts of excess capital and a leverage ratio below its target of 25%, the Company is focused on investing in ways that ensure long-term growth and to improve the ROE to a targeted level of 12% to 14%. With an ROE of 13.0% for 9M 2017, returns have improved slightly from prior years while volatility has reduced. The Company s focus on improving earnings through means within its risk limits has resulted in the materially significant acquisitions in the alternative and liability-driven asset management business lines. Through these acquisitions, the Company is seeking to achieve earnings growth combined with lower capital requirements. While the industry has been negatively affected by increased equity market exposures through segregated fund guarantees, SLF has significantly hedged the income impacts of segregated fund equity exposure for continuing operations and reduced its exposure by disposing of its U.S. annuity business. Although the Company remains subject to various inefficiencies with hedging during volatile markets, it nonetheless currently has a product risk profile that is improved from prior years, and its earnings and regulatory capital ratios are far less sensitive to market volatility. Insurance risks remain similar to the rest of the industry, with adverse experience regarding lapse behaviour and the increasing frequency of disability claims and positive experience with respect to mortality. An important contributor to the strength of the Company s earnings ability are the Canadian operations, which have remained consistently profitable with strong sales in all lines of business. The Company is experiencing good premium growth in Canada, building on its existing scale as well as effectively executing its client-focused strategy to provide better service and to increase engagement levels with its clients. The sales activity has leveraged the capability of the approximately 4,000-member captive agency sales force. The Company s group wealth management business is a leader in both the defined benefit and defined contribution pension plan platforms in Canada. Likewise, Group insurance has a strong market presence, with the Company being a leader in utilizing digital solutions to better engage with clients, including the My Sun Life mobile app and the introduction in 2017 of a digital benefits assistant called Ella. SLF is also focusing on further building out its defined benefits business, where it is a market leader in large annuity sales and buy-ins. In individual lines, sales remain strong despite the adjusted product benefits and pricing with the de-risking activity and pricing in a lower-interest-rate environment. Individual wealth management continues to de-emphasize sales of payout annuities and the older capital-intensive segregated funds. Reduced sales volumes in these lines have been replaced by higher sales of third-party and Sun Life Guaranteed Investment (SLGI) mutual funds. Good sales of SLGI and lower-risk segregated funds, along with the reintroduction of participating insurance policies, is in line with the Company s stated strategy of lowering its risk exposures, especially since the newer segregated fund products have less generous guarantees than were historically present in such products. The acquisition of Excel Funds, an emerging markets fund manager, further offers a complementary asset management solution to its existing product suite. DBRS, in its credit assessment, has the expectation that SLF will report consistent profitability in its Canadian operations, given the oligopolistic nature of the market, a sizable captive distribution sales force, significant efforts in innovation and digital capabilities and the Company s strong market presence, which yields good scale efficiencies. Additionally, the Company s investment in data analytics has the potential to allow it to maintain a competitive advantage in underwriting, pricing and claims management as well as to increase sales and service levels. The Company s U.S. operations contributed 17.1% to common shareholder net income for YTD 2017, driven by good group health insurance sales, even as stop-loss sales remained relatively flat from the prior year. The Company has focused efforts on improving the profitability in the stop-loss segment by repricing large portions of the business, which has recently suffered from increased competition as well as poor experience partially because of higher drug costs. Margins in the group benefits business have been challenging of late, with the Company taking initiatives to reduce expenses, continue ensuring a smooth integration of Assurant s Employee Benefits business that it acquired in 2016 and improve its claim management practices. The Company s International business line is a substantial contributor to the net income of the U.S. operations with good growth potential, even though there is increased competition in this segment from other players attracted to this sector. Offsetting good growth in income for both Group Benefits and International was SLF s large closed block of individual life insurance products, which reported a loss of $168 million for 9M 2017 (compared with $49 million in profit for 9M 2016), partially as a result of unfavourable policyholder behavior experience in this segment. Revenue and earnings from the Company s MFS segment continues to perform well with revenue being generated primarily through stable fee income and asset appreciation. Although gross sales have been steady for the past few quarters, averaging about USD 20 billion a

10 Rating Report Sun Life Financial Inc. DBRS.COM 10 quarter, net sales have continued to be negative. Negative net sales for the past two years reflect a high rate of redemption, partially reflecting the industry-wide trend toward lower-cost passively managed funds, even as MFS has demonstrated good fund performance over the long term. In an effort to generate positive net sales, the Company is working on creating innovative products and expanding its suite of lower-cost products to counter the outflow from investors demanding more competitive pricing. Future outlook will depend partly on consumer preferences and general economic conditions, as well as product innovation by the Company. Headwinds remain in terms of fee pressure, increasing compliance costs, as well as emerging competitors such as robo advisors. SLIM may be expected to grow at a faster pace than MFS, resulting from higher institutional demand for alternative assets compared with traditional mutual funds, although AUM for SLIM remains marginal at $57 billion as at Q compared with almost $600 billion for MFS. Earnings contributions from Asia have been consistent in recent years, reflecting business growth and favourable currency exchange movements. Earnings from SLF Asia represented 12.5% of 2016 total shareholder net income, the contribution having grown in the past few years as the Company increases scale in its chosen markets through increasing interests in its existing subsidiaries, including in India, Indonesia and Vietnam, as well as through distribution partnerships. Increasing distribution strength has been a focus in 2017 as the Company builds out a captive agency force in all the Asian markets that it participates in, with the most recent efforts being in Malaysia. SLF is also experimenting with direct means of distribution, including partnering with telephone company (telco) and financial technology (fintech) companies to sell its products, although policies sold in this manner are generally of very small face amounts and not yet meaningful to overall sales. Sales growth in 2017 has been driven primarily by increased wealth sales, including mutual funds sales in India and pension sales in Hong Kong, rather than of protection products. Business growth has been achieved through sales agent growth and expanding bancassurance distribution, with recent acquisition activity focusing on the MPF business in Hong Kong as well as a nonexclusive distribution partnership with DBS Bank India. In recent years, SLF has also expanded to new markets in Malaysia and Vietnam. Asian growth has been driven by the increasing volume of sales in well-established markets such as Hong Kong and the Philippines, as well as growing sales in nearly all of the less established markets. Earnings in Asia depend largely on the strength of distribution channels, with price competition being secondary in importance as a driver of sales. The Company has chosen to be conservative in deploying capital by, for example, preferring to partner with smaller banks for bancassurance deals. With its excess capital position, SLF is in a good position to make further acquisitions to build scale, although finding good value may prove to be difficult in the competitive environment. Earnings from the U.K. closed block of business have been a source of profits because of the comparative predictability of liability cash flows and lack of further development needs, although some long-dated risks remain. Supporting the Company s excellent earnings ability, SLF Canada and Sun Life Asset Management are expected to remain the main profit contributors for the Company for the near future. The scale achieved in group benefits as a result of the Assurant business unit acquisition will allow the Company to improve its earnings in the United States as the additional revenue generated starts making its way into profits and as the Company s initiatives to improve margins by managing expenses and claims gain traction. The Company is well positioned to take advantage of demographic trends through its suite of wealth and insurance products, as the aging global population focuses on their retirement and wealth management needs. Expanding and entering new markets in Asia are expected to absorb a portion of the emerging profits from the Asia ventures that are reinvested through spending on building distribution, new sales strain and operational capabilities. As local and foreign insurance competitors are also interested in expanding in Asian markets, the Company faces the challenge to selectively expand its profitable products while resisting the competitive pressures to match low-priced competitors. While the returns on the Asian business have been low relative to the high pace of sales growth, DBRS has the expectation these returns to steadily improve over time and translate into a higher contribution to total company earnings as the Company s investments in the region pay off. DBRS considers that the decision to focus on less capital-intensive products is constructive for the Company s capital risk profile, especially if current economic conditions continue, although this focus could constrain its diversification, reduce its competitiveness and constrain growth opportunities in a number of traditional products. The Company now has a challenge to achieve profitable organic growth in mature markets, such as Canada, and niche markets, such as the health benefit insurance businesses in the United States. Without the long-tailed guarantee features traditionally associated with life insurance and annuity products, the Company will be more vulnerable to competition from other financial service providers, such as banks and investment management companies. Maintaining its market share will be a challenge, requiring the Company to focus on cost efficiencies, distribution and product innovations. Asia provides good growth potential, but the Company has a relatively small base for the Asian business to have significant income impact in the near term. Maintaining added value in its asset management businesses for example, through relatively strong fund performance and excellent customer service and advice is key to the long-term success of those segments. This is especially important given increasing competition from alternative investment products in both the retail and institutional markets and lower-cost forms of distribution and products than the traditional advisor-sold model.

11 Rating Report Sun Life Financial Inc. DBRS.COM 11 Financial Results ($ Millions) 9 Mos. to Sept YE2016 YE2015 YE2014 YE2013 YE2012 EBIT 2,831 2,652 3,761 3,221 2,709 2,445 2,078 Consolidated net income 2,241 1,998 2,826 2,300 1,882 1,809 1,501 EBIT over total average 14.1% 13.8% 14.6% 13.9% 12.8% 12.1% 10.6% capital Return on common equity 13.0% 12.2% 12.8% 12.3% 11.3% 11.8% 10.2% Liquidity The Company has excellent liquidity overall. SLF s investment portfolio comprises a high proportion of marketable bonds and equities, with 60% of its portfolio consisting of cash, bonds or equities. The Company also has access to a committed bank syndicated credit facility, should the need arise. Cash on hand, including $1.5 billion in excess cash at the holding company level, as well as standby credit facilities are adequate to meet financial obligations under reasonably adverse stress scenarios. Additionally, SLF has a reinsurance program to assist in paying claims should catastrophic events occur. DBRS considers there to be considerable liquidity to run the business. The Company s strong profit flows from Sun Life Canada and Sun Life Asset Management would be able to cover most contingencies. Earnings from its asset management companies also provides a source of dividends independent of its insurance operations. Sun Life Asset Management provides an unrestricted source of dividends to the Company in the unlikely scenario that the Office of the Superintendent of Financial Institutions suspends the upstreaming of dividends to the holding company from its operating insurance subsidiaries. The Company performs regular stress tests that note the potential impact on earnings and regulatory ratios resulting from various economic stressors, including adverse movements in equity markets and interest rates. The Company s hedging programs, while beneficial in their use in managing interest rate, equity market and foreign currency risks, also present some counterparty risk related to a potential increase in collateral-posting requirements during times of stress. The stress tests also deal with the potential of catastrophic events that would result in a spike in claim payments. Capitalization & Asset Quality SLF has good capitalization and asset quality. Over the past several years, the Company has consistently decreased its financial leverage ratio (measured by debt plus hybrids plus preferreds-to-capitalization), with the Q value being 22.5% compared with much higher values four or five years prior (29.7% in 2012). DBRS regards a financial leverage ratio above 30% as limiting financial flexibility. DBRS does not include $600 million of SLF s senior debt outstanding as at Q (reduced from $1.55 billion as at Q1 2016) in its calculation of the Company s financial leverage ratio and instead treats it as operating debt. The Company has employed hybrid Tier 1 capital instruments, such as preferred shares and small amounts of capital trust securities, in its capital structure. Currently, these instruments comprise 11% of the Company s total capital. The Company has a higher proportion of aforementioned instruments in its capital structure than its peers. SLF has consistently improved its fixed-charge coverage ratio to 10.5x for 9M 2017, a value more in line with its credit ratings, compared with lower historical values (5.4x as at YE2012). Increased consistency in earnings and stable debt levels have contributed to the improvement in the ratio. Regulatory capital of the Company s major operating subsidiary, SLA, continues to be conservative, with an MCCSR ratio of 232%, providing additional assurance of sufficient available capital should further risks emerge. DBRS expects that SLA will continue to meet or exceed an MCCSR ratio of 200%. The Company currently has additional capital (comprising of cash and other liquid assets) of $1.5 billion in the holding company that could be invested in SLA. SLF s MCCSR is 252% as at Q3 2017, higher than SLA s MCCSR because of the aforementioned additional assets held at the holding company. As a result of the actions taken to de-risk the business in recent years, including selling the U.S. annuity business, placing other U.S. businesses into runoff and implementing hedging programs, the Company s regulatory capital ratios are higher than average historical values, providing a good buffer to absorb any unexpected losses. The Company is less vulnerable to market risks now than in previous years. The strong regulatory ratios position the Company well when it comes to the implementation of the Life Insurance Capital Adequacy Test, the new regulatory capital framework that will replace the current MCCSR guidelines, effective January SLF maintains a conservative investment portfolio, with 55.6% of its financial assets invested in either cash or debt securities and only 4.2% invested in equities. Its mix of fixed-income securities is relatively conservative, with about 36% in government bonds (comprising

12 Rating Report Sun Life Financial Inc. DBRS.COM 12 mainly of Canadian bonds, with the remainder largely being U.S., U.K. and Filipino bonds) and 56% in corporate bonds. Asset-backed notes comprise 8% ($6.0 billion) of total bonds. The debt securities portfolio is 98% investment grade. Through its holdings of direct mortgages, asset-backed securities (including commercial mortgage-backed securities and residential mortgage-backed securities) and direct real estate holdings, over 20% of the Company s holdings have exposure to real estate. The Company s loans (including mortgages) have excellent characteristics that display prudent underwriting, including low impairment and LTV levels. The mortgage portfolio comprises entirely commercial mortgages, with the Company s real estate holdings in the Alberta office market presenting some risk, although of a manageable exposure. The Company continues to have a much higher exposure to BBB and lower-rated bonds (29.4% as at Q3 2017) than its peer group. The Company has invested in the markets in which it has operations by purchasing sovereign BBB-rated debt, the rationale being that by investing the accumulating premiums locally, the Company is reducing its foreign currency exposures. SLF currently has $19.5 billion in BBB-rated bonds. The Company currently has negligible levels of impaired assets. Efforts have been made in the past few years to de-risk the bond portfolio, including reducing exposures to the oil and gas, metals and mining, and retail sectors, as well as to Eurozone sovereign bonds. The net value of total impairments was $70 million as at September 30, 2017, representing just 0.05% of total invested assets. DBRS expects the Company to maintain its investment portfolio strategy and prudently manage exposures going forward. Extensive policies and monitoring procedures are in place to handle the risk management functions related to invested assets. The enterprise risk management and investment policy framework also ensures that the asset mix of the investment portfolio supports the asset/liability management requirements for duration and cash flow matching. Capitalization ($ Millions) 9 Mos. to Sept YE2016 YE2015 YE2014 YE2013 YE2012 Regulatory Capital Strength Required capital (Sun Life Assurance 6,919 6,998 7,062 6,819 6,056 5,639 5,512 Company of Canada) ($ millions) Available capital Tier 1 ($ millions) 11,843 11,485 11,846 12,513 10,550 10,102 9,229 Available capital Tier 2 ($ millions) 4,177 3,993 4,107 3,875 2,591 2,252 2,272 Total available capital ($ millions) 16,020 15,478 15,953 16,388 13,141 12,354 11,501 MCCSR ratio % 232% 221% 226% 240% 217% 219% 209% Risk-based capital ratio (main U.S % 378.8% 200.3% 169.7% 234.4% subsidiary) % Leverage Total capital ($ millions) 26,667 26,488 26,902 24,607 21,737 20,453 19,982 Financial leverage ratio 22.5% 25.6% 25.2% 22.1% 23.6% 27.4% 29.7% Fixed-charge coverage ratio 10.5X 9.5X 10.0X 9.3X 7.2X 3.9X 5.4X Interest charge coverage ratio 16.3X 15.0X 15.5X 15.6X 12.4X 6.7X 9.1X Goodwill & other intangibles to common equity 33.6% 36.0% 35.6% 32.2% 30.4% 33.1% 34.3% Tangible common equity to total capital 49.9% 46.7% 47.1% 52.3% 52.7% 48.2% 45.8% Tangible non-par capital to non-par liabilities N/A N/A 24.7% 24.8% 24.5% 26.5% 26.3% Par capital to par liabilities N/A N/A 1.2% 0.5% 0.4% 0.4% 0.4% Total capital to net policyholder liabilities 23.6% 22.8% 23.8% 22.8% 21.7% 23.3% 23.1% Protection Ratios Quality assets to non-capital liabilities 51.2% 51.4% 51.0% 50.6% 51.0% 50.5% 45.9% Total capital to riskier assets ratio 73.4% 69.7% 73.5% 68.7% 65.7% 67.8% 68.4%

13 Rating Report Sun Life Financial Inc. DBRS.COM 13 Sun Life Financial Inc. (TSX: SLF) Balance Sheet (As Reported) ($ Millions) As at Sept YE2016 YE2015 YE2014 YE2013 YE2012 Assets Cash, cash equivalents and short-term securities 8,063 7,992 8,642 8,983 6,818 7,636 7,026 Debt securities 70,562 76,039 71,887 69,896 66,214 54,813 54,362 Equity securities 5,991 5,731 5,774 5,313 5,223 5,194 5,026 Mortgages and loans 41,226 39,707 40,775 39,103 33,679 30,313 27,248 Derivative assets 1,510 2,910 1,608 1,866 1, ,113 Other invested assets 4,020 3,851 3,931 3,111 2,375 1,855 1,272 Policy loans 3,066 3,112 3,141 3,151 2,895 2,792 2,681 Investment properties 7,034 6,492 6,592 6,540 6,108 6,092 5,942 Invested assets 141, , , , , , ,670 Other assets 4,945 4,524 5,109 4,567 3,429 3,270 2,657 Reinsurance assets 4,124 5,437 5,144 5,386 4,042 3,648 3,240 Deferred tax assets 1,473 1,552 1,448 1,372 1,230 1,303 1,099 Property and equipment N/A N/A N/A N/A Intangible assets 1,598 1,672 1,703 1, Goodwill 5,145 5,302 5,317 4,646 4,117 4,002 3,911 Assets of disposal group classified as held for sale N/A N/A N/A N/A N/A N/A 15,067 Total general fund assets 158, , , , , , ,171 Investments for account of segregated fund holders 102,237 95,386 97,167 91,440 83,938 76,141 64,987 Investments for account of segregated fund holders c N/A N/A N/A N/A N/A N/A 27,668 classified as held for sale Total Assets 260, , , , , , ,826 Liabilities and Equity Liabilities Insurance contract liabilities 113, , , , ,228 88,903 87,275 Investment contract liabilities 3,035 2,913 2,913 2,913 2,819 2,602 2,303 Derivative liabilities 1,823 2,803 2,512 3,378 1, Deferred tax liabilities Other liabilities 11,887 12,132 12,399 12,332 9,725 8,218 8,169 Senior debentures 1,299 1,299 1,299 2,248 2,849 2,849 2,849 Subordinated debt 3,038 3,835 3,836 2,492 2,168 2,403 2,740 Liabilities of disposal group classified as held for sss N/A N/A N/A N/A N/A N/A 12,689 sale Total general fund liabilities 135, , , , , , ,625 Insurance contracts for account of segregated fund h N/A N/A N/A N/A N/A N/A 59,025 holders from continuing operations Insurance contracts for account of segregated fund h 95,282 88,388 90,388 83,670 76,736 69,088 27,668 holders Investment contracts for account of segregated fund h 6,955 6,998 6,779 7,770 7,202 7,053 5,962 holders Total Liabilities 238, , , , , , ,280 Equity Issued share capital and contributed surplus 10,926 10,917 10,943 10,900 10,805 10,902 10,621 Shareholders retained earnings and accumulated 11,372 10,687 11,013 10,350 8,067 6,452 5,925 other comprehensive income Total shareholders equity 22,298 21,604 21,956 21,250 NA NA NA Participating policyholders equity NA NA NA Total Equity 22,931 21,955 22,368 21,418 18,872 17,354 16,546 Total Liabilities and Equity 260, , , , , , ,826 Source: SNL Financial.