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Sun Life looks to reduce risk, sells U.S. annuity unit for $1.35-billion

Sun Life Financial CEO Dean Connor, speaks to the media during a press conference at the company's Toronto office on Thursday, March 8, 2012.

Michelle Siu for The Globe and Mail/michelle siu The Globe and Mail

Sun Life Financial Inc. is selling for $1.35-billion (U.S.) a risky American division that swings wildly between profits and losses in an effort to focus on growth in Canada and Asia.

In chief executive officer Dean Connor's first big deal since joining the company last year, Sun Life is joining the parade of insurers that are slashing exposure to U.S. annuities due to mounting losses amid rock-bottom interest rates and volatile equity markets.

"This simplifies our business model in a pretty significant way," Mr. Connor said of the sale to Delaware Life Holdings. "You take equity risk, interest rate risk and policy holder risk, and in one fell swoop through this transaction we are significantly de-risking Sun Life in a way that separates us from most of our competitors in North America."

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Sun Life is among many life insurers grappling with exposure to wobbly stock markets and low interest rates. Some of the investments sold by insurers that come with a guaranteed return leave the seller – the insurance company – on the hook for any losses.

And with interest rates near zero, the companies are left with poor returns on their own cash.

Peter Routledge, an analyst with National Bank Financial, said the move was a positive one for Sun Life shareholders and that the sale was the "cleanest divestiture" of an annuities unit he'd seen from an insurer.

Canada's third-largest life insurer by assets said last December that it would stop selling the products and eliminate hundreds of jobs, causing the stock to spike. Now, the company said it would make a "transformational" change through a sale of the unit, cutting its susceptibility to fluctuating equity market conditions by half and reducing low-interest-rate sensitivities by more than one-third.

Delaware is a newly created company owned by some shareholders of Guggenheim Partners – an investment management firm that owns a variety of insurance and banking businesses, and notably purchased the Los Angeles Dodgers in April.

Annuities also bedevilled other insurers such as Manulife through the financial crisis – after the stocks that backed the portfolio decreased in value, the company had to allocate billions in capital to account for the difference, and it moved to curb the sales of these products.

Sun Life, which hedged its bets more effectively leading up to the crisis and housed its U.S. annuities business in a holding company that operated as a separate entity, was able to sell its division completely, Mr. Routledge said. In contrast, Manulife's U.S. annuities products are locked up in its subsidiary, John Hancock Financial Services Inc.

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Industrial Alliance Insurance and Financial Services Inc. tackled its own U.S. annuity woes in the summer in a deal with companies linked to Guggenheim Partners.

U.S.-based insurers have made similar efforts to reduce their annuities exposure. Hartford Financial Services Group Inc., for example, sold its individual life insurance business to Prudential Financial Inc. in September.

For Sun Life, Monday's move was viewed in the neutral-to-positive range by investors and analysts – enough to balance out the negative financial implications of the deal. "Although the transaction is expected to reduce Sun Life's earnings by 22 cents per share in 2013, we view the transaction as positive from a fixed-income perspective as it reduces the company's risk profile and earnings volatility," George Lazarevski, an analyst at BMO Nesbitt Burns, wrote in a note to clients.

The deal is expected to close at the end of 2013's second quarter, following which Sun Life's holding company will have $1.9-billion in cash on hand, after the $350-million it plans to repay in debt by June.

Some of that capital is cash the company can allocate to its growth strategies both in Canada and abroad. "This transaction gives us additional capital that we can invest in growth, and that growth can be organic, and it can be through [mergers and acquisitions]," Mr. Connor said. "We continue to actively look at M&A, doing it in a careful and disciplined way, so this transaction gives us more flexibility in that regard."

That growth will be in one of four areas Sun Life has targeted for expansion: Canadian life insurance business, its U.S. group insurance and benefits unit, its asset management business (MFS Investment Management) and Asia.

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Editor's Note: An earlier online version of this story incorrectly stated that Delaware Life Holdings is owned by Guggenheim Partners. This online version has been corrected.

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About the Author
Financial Services Reporter

Jacqueline Nelson is a financial services reporter at the Report on Business. Prior to that she was a staff writer at Canadian Business magazine, covering news and writing features on a wide variety of subjects. More


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