Canadian insurer Great-West Lifeco Inc. is boosting its presence in the U.S. retirement industry with a $4.45-billion deal to buy the retirement business of Prudential Financial Inc.
On Wednesday, Great-West subsidiary Empower Retirement announced its largest U.S. acquisition, adding US$314-billion in assets and four million clients by acquiring the full-service retirement business of New Jersey-based Prudential Financial.
The deal, which is expected to close in the first quarter of 2022, will increase Empower’s client base to 16.6 million participants with more than US$1.4-trillion in assets under administration in 71,000 workplace savings plans.
“Empower’s acquisition of Prudential is adding significant scale and capabilities that we did not have before,” Paul Mahon, chief executive officer of Great-West Life, said in an interview.
Mr. Mahon said Empower will now be able to manage employees’ non-qualified deferred compensation plans, typically provided by many U.S. companies to their highest earners.
“That is something that we would have outsourced to a third party. Now we’ll be able to embed that capability in a seamless way,” he added.
Great-West Lifeco, which is a subsidiary of financial behemoth Power Corp. of Canada, has been on a buying spree as it looks to continue its expansion into the U.S. retirement market and participate in that country’s consolidation of the defined-contribution retirement plan recordkeeping space.
In 2018, Paul Desmarais Jr., Power Corp.’s then co-CEO, flagged the U.S. retirement market as a major growth target for the company, saying it had set aside $10-billion for future acquisitions.
In June, 2020, Empower purchased digital wealth manager Personal Capital for an initial US$825-million, with the potential to add US$175-million if certain growth metrics are met. Three months later, Empower bought the retirement business of Massachusetts Mutual Life Insurance Co., adding US$167-billion in assets and approximately 2.5 million clients to its roster.
The number of recent acquisitions is of “some concern” for analysts at DBRS Morningstar, as Great-West is still in the process of fully integrating MassMutual’s U.S. retirement business services, which it closed in December, 2020.
“Adding on Prudential’s U.S. retirement business increases the operational and execution risk associated with both transactions,” Marcos Alvarez, head of insurance at DBRS, said in a research note Wednesday. “Nonetheless, [we] view Great-West as having the necessary expertise to successfully integrate both transactions.”
Mr. Mahon said Empower has a strong track record of successful M&A integration and expects the Prudential deal to “highly and immediately” add to its bottom line.
Prudential’s full service retirement business is expected to contribute about US$325-million in after-tax earnings to Empower by the end of 2023, and result in about $180-million in cost savings over the next 24 months, according to Great-West.
“The Prudential customer base has an average tenure of 17 years, so very strong customer relationships, and we think we can transition those strong relationships over to Empower,” Mr. Mahon said.
Prudential’s total transaction value of $4.45-billion includes $2.6-billion of required capital that Great-West needs to put aside to support the business. Great-West Lifeco will fund the deal with about US$2.15-billion of debt and cash on hand.
After the deal, Empower is expected to increase its contribution to Great-West’s earnings to approximately 30 per cent – up from its current 10 per cent of base earnings.
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