Sun Life Financial is adjusting to persistently low interest rates by selling its U.S. variable annuity and certain life insurance businesses for US$1.35 billion to Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners.
"This transaction represents a transformational change for Sun Life," Dean Connor, the Toronto-based company's president and chief executive officer, told analysts in a conference call to discuss the deal.
"The proceeds of the transaction will provide funding for our organic growth plans as well as for potential opportunities to make smaller acquisitions that move our strategy forward."
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, 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 allow it to pay off some debt.
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 sale of the U.S. annuity business will allow Sun Life management to focus time and capital on the company's U.S. group benefits business, which remains one of "four pillars" of growth, he said.
"We've been moving quickly in 2012 to de-risk, transform and grow our businesses," Connor said.
"We believe the decision to sell this business is in the best interest of our shareholders. We're pleased to have a partner with Gugeenheim's financial strength and insurance capabilities who will bring the right approach for staff and policyholders."
The businesses being sold have 120 employees in Lethbridge, Alta., and 380 in Wellesley, Mass. and Waterford, Ireland.
Sun Life stopped all variable annuity and life insurance sales earlier this year while changing its product line as it works towards its goal of boosting operating profits to $2 billion in 2015 and with operating return on equity of 12 to 13 per cent.
Low interest rates have hit insurance companies in an number of ways, including lower yields on bonds and increased costs of hedging equity exposure that could affect variable annuities.
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."
Sun Life's move comes four months after Industrial Alliance Insurance and Financial Services agreed to sell its U.S. annuity business to Equitrust Life Insurance and Security Benefit Life Insurance, which are both affiliates of Guggenheim Partners.
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.
In September, ratings agency DBRS placed 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.
DBRS said its action also reflected uncertainty associated with the company's strategic plan to restore profitability and earnings stability by pursuing more profitable products with fewer embedded risks and lower capital requirements.
It said Sun Life faces a string of challenges, including the continuing weak economic and interest rate environment aggravated by evolving regulatory measures.
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.