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

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 subsidiaries at 'AA-' and its U.S. life insurance subsidiaries at 'A-'. The Rating Outlook is Negative. A complete list of ratings follows at the end of this release.

The Negative Outlook reflects the risk that SLF's earnings will remain volatile and the company may be unable to generate run-rate operating earnings and debt service capacity that is supportive of the current rating level. Additionally, Fitch believes management of the closed block of U.S. business will continue to be a challenge and there is a risk for further charges as the book matures. As such, the discontinued U.S. operations may continue to be a drag on overall earnings or require further capital injections from SLF.

SLF reported operating net income of CAD727 million in the first quarter of 2012 as the company benefitted from improvements in capital markets. Full-year 2011 operating net income was CAD104 million and included a number of one-time charges and the unfavorable impact from declines in equity markets and interest rate levels. While SLF has taken a number of steps to improve profitability including increasing its interest rate hedging on its segregated fund and variable annuity (VA) business and exiting certain lines of business, Fitch believes earnings remain susceptible to capital market movements.

The affirmation of the ratings reflects SLF's strong capitalization; disciplined investment strategies that have resulted in strong liquidity and solid asset quality; and 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 higher levels of operating debt issued from the parent company than many peers, low debt service capacity and sizable common shareholder dividends.

Financial leverage was 21% at March 31, 2012. Pro forma financial leverage following the company's planned redemption of CAD800 million of subordinated notes in June 2012 is 17%. Fitch views SLF's debt service capacity on a Canadian IFRS earnings basis, excluding the impact of equity markets and interest rates, of approximately 8x during the first three months of 2012 and 3x in 2011 as volatile for the rating level and below historical levels above 9x. However, Fitch believes that under Canadian regulations, SLF has greater flexibility to upstream dividends from operating subsidiaries without regulatory approval than do most U.S. peers.

Fitch believes that SLF is well-capitalized on a risk-adjusted basis, with the minimum continuing capital and surplus requirement (MCCSR) for Sun Life Assurance Company of Canada of 213% at March 31, 2012 and the NAIC risk-based capital (RBC) ratio for Sun Life Assurance Company of Canada (U.S.) of 412% at year-end 2011 after a USD300 million dividend was upstreamed to the holding company in the fourth quarter. Positively, the U.S. operations have not required a capital contribution since 2009.

Fitch views SLF's U.S. life subsidiaries as having Limited Importance from a strategic perspective following the company's decision to exit the U.S. VA and individual insurance markets at year-end 2011. On a stand-alone basis, the ratings are in the 'BBB' category but the companies continue to benefit from SLF's ownership. Fitch expects SLF to support these subsidiaries should additional capital be required. However, Fitch believes SLF will look for ways to accelerate the release of capital from the run-off block of business via a sale or reinsurance transaction.

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

--A lack of improvement in debt service capacity;

--Failure to achieve progress in meeting management's stated target of CAD2 billion of operating net income and 12%-13% operating return on equity (ROE) by 2015;

--Significant charges related to the company's run-off U.S. operations that lead to additional capital contributions from the holding company;

--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% or U.S. RBC ratio falling below 350%;

--An increase in financial leverage to over 25%;

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

The key rating triggers that could result in a return to a Stable Outlook include:

--An improvement in adjusted fixed-charge coverage, excluding equity market and interest rate impacts, to over 6x;

--Successful management of the run-off U.S. operations or early release of capital via a reinsurance transaction or sale;

--A decrease in financial leverage to below 15%.

Fitch has affirmed the following ratings with a Negative Rating Outlook:

Sun Life Financial, Inc.

--Issuer default rating 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+';

--5.12% subordinated debentures due 2018 at 'BBB+';

--7.9% subordinated debentures due 2019 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';

--6% noncumulative preferred shares, series 6R, 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 rated 'BBB'.

Sun Life Assurance Co. of Canada

--IFS ratings at 'AA-';

--IDR at 'A+';

--6.15% deferrable subordinated notes due 2022 at 'A';

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

Sun Life Assurance Co. of Canada (U.S.)

--IFS ratings at 'A-'.

Sun Life Insurance & Annuity Co. of NY

--IFS ratings 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 ratings above were unsolicited and have been provided by Fitch as a service to investors. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology', Sept. 22, 2011.

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=651018

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