Sun Life aims to grow U.S. group insurance after sale of variable annuity unit

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Sun Life Financial will focus on growing its U.S. group insurance and asset management businesses after selling the more volatile variable annuity life insurance unit for US$1.35 billion to Delaware Life Holdings.

Dean Connor, the Toronto-based company's president and chief executive officer, called the transaction a "transformational change" for Sun Life.

"We think it really, fundamentally repositions the company in a unique way relative to other life insurance companies in North America and significantly derisks and demystefies the company," he said in an interview on Monday.

"The uncertainty and the risk around this variable annuities business have been an overhang for investors so we think that this really strips that away and allows us to focus on our four pillars of growth."

Sun Life has the 10th largest employee benefits business in the United States and its Boston-based MFS asset management business has more than US$300 billion of assets under management.

The company hopes to grow to become a top five voluntary benefits provider and expand MFS to help reach its stated target of boosting operating profits to $2 billion in 2015 and with operating return on equity of 12 to 13 per cent.

"This is a business that is firing on all 12 cylinders, it's doing really well, terrific investment performance with a very rapid growth trajectory, so we're quite positive about the U.S. market for both of these businesses," Connor said from Toronto.

The U.S. annuity business has been challenging in recent years due to a combination of low interest rates, difficult equity markets and a substantial increase in the amount of capital required by regulators.

Sun Life (TSX:SLF) said the sale of the U.S. annuity business to the company owned by shareholders of Guggenheim Partners, which is expected to close in mid-2013, will reduce next year's earnings by about 22 cents per share and cut Sun Life's book value by $950 million or about $1.60 per share.

However, the deal will increase Sun Life's cash holdings to $1.9 billion and help fund smaller acquisitions.

Connor said Sun Life plans to maintain its current level of dividends on common shares and use about $350 million of the proceeds to repay debt that matures in June.

The annuity unit's sale has been in the works since the spring and was concluded following a competitive process involving an undisclosed number of bidders.

Connor said the sale was a difficult transaction because it involves a very complex business for which there isn't a "big, deep and natural market of buyers."

"The variable annuity business is a mainstay of U.S. life insurance companies so the nub of this transaction is that in one fell swoop significantly reduces the equity and interest rate and policy holder behaviour risk for Sun Life in a way that distinguishes us relative to most of our North American competitors."

The businesses being sold have 120 employees in Lethbridge, Alta., and 380 in Wellesley, Mass. and Waterford, Ireland.

Sun Life has been moving to reduce the risk of its operations by stopping all variable annuity and life insurance sales earlier this year.

Speaking on behalf of Delaware Life Holdings, Guggenheim Partners president Todd Boehly said: "Together with Sun Life Financial's employees, we look forward to maintaining a high level of customer service, strong capitalization and ratings and to building on this impressive platform."

DBRS said Monday's announced sale doesn't affect its decision in September to place Sun Life's debt and preferred share ratings under review with negative implications reflecting the company's weak profitability and earnings volatility associated with outside market forces.

The business being sold represents 10 to 15 per cent of Sun Life's normalized earnings and $30 billion to $40 billion of assets, but also accounted for much of the earnings volatility experienced by the company over the past five years.

The ratings service said the sale has been expected and that Sun Life had already been given credit for managing credit and equity market risk.

"DBRS believes that the announced sale is incrementally positive for the company’s longer-term credit rating profile," it wrote in a report.

However, it remains concerned about the strategic position of the industry in a difficult economic environment and isn't convinced that its earnings projects outside its core Canadian profitability will be achieved by 2015.

Moody's Investors Service downgraded the insurance financial strength (IFS) rating of the U.S. entity being sold to Baa2 but also put Sun Life Financial's Baa3 rating on review for upgrade based in part on its top three market position in Canada, predictable earnings and solid capitalization.

"The proposed transaction is positive to the credit profile of Sun Life Financial as it will eliminate the group's exposure to the chronically poor earnings performance of the U.S. subsidiary," it stated in a report.

Robert Sedran of CIBC World Markets said the financial implications of the deal are largely negative, while the strategic and risk implications are positive.

"The financial implications are more negative than we had assumed both in terms of the book value decline and the ongoing earnings impairment," he wrote in a report.

While the deal reduces Sun Life's sensitivity to equity markets by half and to interest rates by 35 per cent, the analyst said these sensitivities weren't excessive anyway.

"What it does do is clean up the company from a strategic perspective by allowing it to free up time and capital that would otherwise have been engaged for years in what was a closed business. From that perspective, the deal is a positive," Sedran said.

Sun Life employs about 16,000 people, including 7,000 in Canada, and has insurance, wealth management and mutual fund operations around the world.

Sun Life shares slipped 53 cents or about two per cent to $27.30 in midday trading Monday, just short of a 52-week high of $28 set last week.