Sun Life’s $1.35-billion annuity deal clears regulatory hurdle

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Sun Life Financial Inc. is preparing to close the $1.35-billion sale of its domestic U.S. annuity business after gaining the approval of a New York regulator.

In June, the insurer said it was taking an unexpectedly long time to complete the transaction after the New York Department of Financial Services (DFS) expressed concerns about private equity firms buying into the annuities business.

That's because Sun Life's buyer wasn't another insurance company. It was Guggenheim Partners LLC, a privately held global financial services giant, through its company Delaware Life Holdings LLC. But the deal ran into a roadblock when a regulatory probe sought more clarity on whether insurers' annuity assets – which were increasingly getting bought up by private equity firms – were regulated strictly enough.

Benjamin Lawsky, New York State's superintendent of financial services, was concerned that the short-termism of private equity would not be suitable for annuity policyholders, since annuities guarantee buyers long-term periodic payments in exchange for an upfront lump sum. Mr. Lawsky needed time to consider whether investment companies such as Guggenheim would be able to support customers in the years to come.

But on Wednesday, the DFS said it would approve the transaction, saying that "for the first time a private equity firm has agreed to an enhanced set of policyholder safeguards ... which will help better protect retirees and others receiving annuity payments."

The conditions to the regulatory approval included four mandates. First, Guggenheim agreed to maintain Sun Life New York capital at levels of at least 450 per cent to protect against unexpected losses.

But in the event "risk-based capital level" dips below the set standard, Guggenheim also agreed to keep $200-million aside to "top up" those levels, the DFS statement said.

The investment firm will also need to gain approval from the DFS to change any plans of operations, including investments, dividends or reinsurance transactions.

Finally, Sun Life New York will have to adhere to strict disclosure rules, including filing quarterly risk-based capital level reports to the DFS.

The regulator's decision may have future implications for other firms looking to buy up annuities businesses, Mr. Lawsky warned. "These policyholder protections can and should serve as a model set of guardrails," he said in a statement. "Other non-traditional insurance industry investors asking us to approve similar transactions are going to have to step up and clear a high bar for protecting policyholders."

Sun Life can heave two sighs of relief. One for clearing the deal, and another for getting rid of its U.S. annuities business, since these products have been hurt by persistent low interest rates and are more volatile.

Sun Life said it would stop selling variable annuity and individual insurance products in the U.S. back in 2011. The next year, it said it would sell the business unit to Delaware.

As The Globe has previously reported, this is the first major deal done by Sun Life chief executive officer Dean Connor, who said the sale simplified the company's business model. Analysts said the deal was a positive for the insurer, and expressed confidence the deal would close, despite the setbacks.

Sun Life reports earnings on Aug. 7 and is in a quiet period, so the company declined to comment.

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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