Ratings giant Standard & Poor’s warned on Tuesday it may downgrade Sun Life Financial Inc. a day after the company announced it will discontinue U.S. sales of variable annuities and individual life products.
S&P said the move to reduce the U.S. product line could result in “a reduction in earnings quality or diversification”, potentially impacting Sun Life’s business or financial risk profile.
S&P placed its ratings including its counterparty credit rating on Canada’s third largest life insurer on watch for a possible downgrade.
Further, S&P said it no longer considers Sun Life U.S. “to be core to Sun Life Financial Inc.”, the Canadian parent, “primarily because Sun Life U.S. will cease writing meaningful new business as of Dec 31, 2011,” diminishing the company’s presence south of the border.
It said it expects to make a final decision on the ratings within three months following further analysis of the situation.
Insurance companies typically employ the premium payments from policy holders to buy fixed income investments, relying on the interest revenue to meet future policy obligations.
But the current low interest rate environment has put huge pressure on the industry as revenue from investments has plummeted, slashing profit margins and forcing players to reconsider strategy.
In addition, new financial industry regulations especially in the United States have also been onerous, increasing both administrative and capital costs.
Meanwhile, the variable annuity business has been hit by stock market volatility and declining expectations in the face of the European debt crisis.
Sun Life isn’t the only player to revamp strategy around life insurance. At the end of November Standard Life Assurance of Canada, a subsidiary of U.K.-based Standard Life Plc, announced it would stop selling plain vanilla life policies in this country.
Shares in Sun Life slipped 3.2% to close at $19.22.
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