Sun Life Financial president and CEO Dean ConnorMARK BLINCH/Reuters
Sun Life Financial Inc. is caught up in a U.S. regulator's concerns about whether investment companies that own some insurance businesses are investing thoughtfully enough to support customers in the long-term.
And on Friday the insurer said completion of its a $1.35-billion (U.S.) deal to sell its U.S. annuity business is taking longer than expected as a result.
The New York Department of Financial Services' approval is the last regulatory hurdle Sun Life must clear before it can close its deal with U.S. investment company Guggenheim Partners. A couple of months ago reports surfaced at Bloomberg that the regulator was skeptical about about the abilities of such firms to keep the long term financial promises that annuities sell to aging customers.
The expense of the annuities contracts was part of the reason Sun Life was looking to be rid of them. In 2011, the insurer said it would end sales of variable annuity and individual insurance products the U.S., and a year later said it would sell the business unit to Delaware Life Holdings, a company owned by shareholders of Guggenheim.
It was the first major deal done by Sun Life chief executive officer Dean Connor, who said the sale simplified the company's business model. "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," he said in an interview in December.
Guggenheim has been buying annuity businesses on both sides of the border. In Canada, Industrial Alliance Insurance and Financial Services Inc. penned deals to shed their U.S. annuity businesses last year.
An annuities contract lets a buyer pay a lump sum to an insurer in exchange for guaranteed periodic payments, which can be popular with retirees. But persistent low interest rates hurt returns on these products, making them less profitable for insurers such as Sun Life that offer them.
Stock markets may be up this year, and some of the interest rate pressure is easing, but that doesn't mean Sun Life was wrong to sell the unit – it still needs the deal to clear.
"Some observers might infer that Sun Life gave up the upside to rising equity markets and interest rates by selling the business when it did. We do not," said analyst Peter Routledge in a note written in May. "We believe that by selling the U.S. annuities business, Sun Life is a less risky company to own. As a result, we lowered rather materially the cost of equity with which we discount its earnings."
Delays make investors nervous, but most analysts are expecting this transaction to close at some point.
Editor's note: This story has been corrected. An earlier version incorrectly said Sun Life said it would sell the annuities business in December. In fact, it announced plans to do so in 2011.
(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)
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Jacqueline Nelson