The Sun Life Financial building in Toronto.Michelle Siu/The Globe and Mail
Insurance company Sun Life Financial Inc. has hired Morgan Stanley to look for buyers for its U.S. annuities business. But whether or not it will get an offer at the right price is still unclear.
Canada's third-largest life insurer is exploring its options for the business, according to a source with knowledge of the proceedings.
An annuities contract allows a buyer to pay a lump sum to an insurer in exchange for guaranteed periodic payments, which can be popular with retirees. But persistent low interest rates have cut into the returns on these products, making them less profitable for the companies that offer them.
Sun Life said in December it would end U.S. sales of variable annuity products, as well as individual insurance products.
In August, Industrial Alliance Insurance and Financial Services Inc. penned its own agreement to a sell its U.S. annuity business to Security Benefit Life Insurance Co. and Equitrust Life Insurance Co. Both companies are affiliates of Guggenheim Partners, one of the financial services and investment companies that has, according to Bloomberg, demonstrated interest in Sun Life's offering. Industrial Alliance's deal amounted to roughly $800-million (U.S.) in contract liabilities and related assets.
In Industrial Alliance's case, it needed to cut the weight of its annuities business to focus on its more profitable U.S. life insurance business – a move the company said at the time would give its solvency ratio an eight percentage point boost.
But just because Guggenheim was sweet on Industrial Alliance, doesn't necessarily mean it will pony up the cash for Sun Life. According to one source familiar with the process, there are "no guarantees" that the right buyer will be found – primarily because any interested parties may not be willing to pay the amount Sun Life hopes to get for the business. That asking price could be higher than $1-billion, and discussions with a single private bidder could begin within the week, according to Bloomberg reports.
Andre-Philippe Hardy, an analyst at RBC Dominion Securities, issued a report saying that he would not be surprised if Sun Life was looking to get rid of the business at the right price, since the company isn't selling those products in the U.S. marketplace any more. Such a sale would create benefits such as "reduced return on equity volatility and reduced capital requirements," he wrote.
"On the other hand," he wrote, expected profit "would decline and the impact on book value would depend on price paid (and could in fact be negative)." He also said it would be "premature" to draw conclusions as to the impact on Sun Life's share price.
A spokesman for Sun Life declined to comment.
Just a few days ago, Sun Life voiced its commitment to its British operations following reports in the Financial Times that it would not sell its U.K. division to avoid new insurance rules in Europe. This announcement came after rumours surfaced in May that Sun Life had hired a team of bankers to sell the unit.
On top of keeping that business, the company has made clear its commitment to developing units in emerging economies. Those in south-east Asia are a top priority, and the company hopes to keep growing in the area by making small-scale purchases.