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The Sun Life Financial logo at their corporate headquarters in Toronto on Feb. 11, 2019.CHRIS HELGREN/Reuters

Sun Life Financial Inc. SLF-T is selling its British division, freeing up capital from a declining operation as part of a shift toward more profitable fee-based business lines.

SLF of Canada UK Ltd. offers life insurance, pension products and annuities, and has operated as a run-off business since 2001, meaning that the company has not sought out new business and has let policies expire or has paid them off.

Phoenix Group Holdings PLC PNXGF, a London-based long-term savings and retirement business, will buy SLF for $385-million. Phoenix has more than 13 million customers and £310-billion ($485-billion) of assets under administration. The company specializes in buying insurance businesses which are no longer taking in new customers.

Sun Life chief executive officer Kevin Strain told The Globe and Mail that the deal made sense now because the British division was a few years away from becoming unprofitable as policy holders died and beneficiaries were paid.

“We always knew at some point we would have to sell that business because as the number of clients declined, you stop having scale and the economics don’t work,” Mr. Strain said.

He said the deal was attractive because of Phoenix’s leading position in Britain, and the opportunity to expand Sun Life’s money management business through its two asset management companies, Boston-based MFS Investment Management and Toronto-based SLC Management.

As part of the deal with Phoenix, these two Sun Life subsidiaries will continue to manage $9-billion in investments backing the insurance policies, collecting fees for the service. Mr. Strain said the company could also take over management of an additional $25-billion in investments from Phoenix. The deal, subject to regulatory approvals, is expected to close during the first half of 2023.

According to Mr. Strain, Sun Life will retain part of its business that pays annuities – regular guaranteed income in retirement – and will continue to generate $30-million in income in the form of insurance payments for at least the next 10 years.

The deal reflects Sun Life’s long-term goal to move away from long-duration, guaranteed insurance businesses, which Mr. Strain said had been becoming less profitable in a declining-interest-rate environment over the past decades. Instead, the insurance company has pivoted to fee-based products, group insurance, shorter duration business and asset management.

Global interest rates have shot up over the past few months as central banks try to manage the effects of inflation. In July, the Bank of Canada hiked interest rates to 2.5 per cent. On an analyst call on Thursday, Sun Life chief actuary Kevin Morrissey said the company has positioned its portfolio to take advantage of current market conditions.

Sun Life announced the British divestiture as it released its second-quarter earnings for the three months ending June 30, which beat analyst estimates.

Net income declined to $785-million, down 13 per cent from the previous year. However, its “underlying net income,” which strips out investment losses and makes other accounting adjustments, was up 1 per cent to $892-million or $1.52 a share.

The company said the decline in net income also reflected the costs of acquiring DentaQuest, the second-largest dental benefits provider in the United States. Sun Life closed the purchase in June, as it continues its strategy to expand south of the border. The company reported US$38-million in acquisition charges for its U.S. operation.

Net income from Sun Life’s Canadian business dropped by 60 per cent to $160-million from $404-million in 2021. The declines reflected rising interest rates and the drop in most global stock markets in the second quarter. Insurance companies hold a mix of stocks, bonds and other assets to back their insurance payouts, and also have a variety of financial instruments that gain or lose value based on market conditions. Sun Life said its “market-related impacts” subtracted $152-million from profits in the quarter.

However, underlying net income for Canada rose 19 per cent from the same quarter last year to $344-million. Mr. Strain said the Canadian business benefited from the sale of two additional group retirement service mandates, and the improvement of the company’s disability insurance claims.

Sun Life shares closed up 2.25 per cent to $60.47.

With files from David Milstead.

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