Sun Life refocuses

In mid-December, Sun Life announced a US$1.35-billion deal to sell its U.S. annuity business, along with certain life insurance businesses, to Delaware Life Holdings, a company owned by shareholders of privately held investment firm Guggenheim Partners LLC, which is headquartered in New York and Chicago.

The transaction, which is subject to regulatory approval and expected to close by the end of the second quarter of this year, reduces Sun Life’s exposure to volatile financial markets considerably. The U.S. annuity business represents about 10% of Sun Life’s earnings, but comprises about 50% of its equities market risk and 35% of its interest rate risk.

“[The deal] is, in that sense, a transformational transaction,” says Dean Connor, president and CEO of Sun Life, “in that we can significantly ‘de-risk’ the company and free up capital – a significant amount of capital.”

The proposed sale includes Sun Life’s U.S. domestic variable annuity, fixed annuity and fixed index annuity products, corporate and bank-owned life insurance products, and variable life insurance products. The company continues to manage an in-force book of individual life insurance in the U.S. but has ceased new sales in that space. Says Connor: “That’s a business that will run off slowly, gradually, over many years.”

The deal reflects a broader commitment by Sun Life to shift away from non-core lines of business in recent years, says Byren Innes, senior vice president and director with NewLink Group Inc. in Toronto: “It has gone through a series of shutting down businesses and divesting certain businesses in order to de-risk. And this was the last big piece.”

The sale is not a surprise to analysts, having come about a year after Sun Life announced that it would stop selling new annuities in the U.S., which clearly signalled the company’s intentions to step back from that line of business amid increasingly challenging market conditions.

“The U.S. annuity market was, and is, a challenging market, for a number of reasons,” Connor says. “The economics of the product aren’t as strong.”

Specifically, low interest rates have squeezed the profitability of long-term guaranteed products such as annuities. For Canadian insurers, this squeeze is exacerbated by capital requirements that are higher than those facing U.S. insurers.

Furthermore, intense competition in the U.S. annuity space – especially for variable annuities – has enhanced the benefits of the products for consumers while making them more costly for insurers to provide, Connor says: “There’s remarkable competition on product features and pricing that make it difficult to earn an appropriate risk-adjusted return.”

Although the variable annuity business in Canada is subject to many of the same challenges, the amount of assets in the products on this side of the border represent just a fraction of those in the U.S. In addition, the features of the Canadian products are generally less generous than those in the U.S., which means Canadian products carry less risk for insurers.

“The Canadian market is in a fundamentally different place for us,” Connor says. “The Canadian competition never entered the arms race in the way that the U.S. market did, so the product features never got as overly generous or overly risky as the U.S. market did.”

Furthermore, the riskiest aspects of these products, such as guaranteed minimum withdrawal benefits (GMWBs), largely have been diluted by Sun Life and other Canadian insurers – and some providers have ceased sales of the products altogether. In Sun Life’s case, sales of GMWBs through the independent advisor channel have been suspended, whereas clients can still purchase the products through Sun Life career advisors. This move, Connor says, reflects Sun Life’s efforts to support the success of its career advisors by providing them with access to as many competitive products as possible.

@page_break@ Thus, although variable annuities are not immune to risks in the Canadian market, Connor considers them an important part of Sun Life’s offerings. “In the context of a much broader portfolio of wealth-related products,” he says, “we’re comfortable that we can manage those risks.”

Given the heftier risks associated with the U.S. business, Innes considers the recent transaction to be a good move by Sun Life. “It’s very positive,” he says, “from a consumer point of view, a financial stability point of view and from an advisor’s perspective, because they’re now selling products from a company that is inherently less risky.”

Credit-rating agencies responded in a similarly positive manner, with Toronto-based DBRS Ltd. calling the sale “incrementally positive for the company’s longer-term credit rating profile.”

The deal wasn’t perceived quite as positively by stock markets, however, due to its impact on Sun Life’s earnings, which the firm expects will amount to 22¢ a share in 2013. Sun Life’s stock price dropped by about 4% on the day the transaction was announced.

“It’s negative from an investment point of view,” Innes says. “[Sun Life] is taking less riskier bets and, therefore, it will not hit the big home runs any more.”

With U.S. annuities out of the picture, Sun Life’s focus in the U.S. now is squarely on group insurance and benefits. Sun Life is one of the top 10 providers in this space and the only insurer in North America active in that line of business in both Canada and the U.S. This business provides important economies of scale, Connor says, given the technologically heavy nature of the business.

“We have an ability to leverage across the border,” he says. “We leverage products, ideas and technology and innovation from the U.S. to Canada, and vice versa.”

Given the strong growth prospects in group business, Sun Life has identified U.S. group benefits as one of four “pillars” that comprise the company’s overall growth strategy. The other pillars include the Canadian life insurance business, the global asset-management business (through Boston-based MFS Investment Management) and the Asian markets. Connor expects that each of these pillars will help Sun Life generate strong growth, higher return on equity and lower volatility.

These four pillars will be top of mind for Connor when considering options for redeploying the proceeds from the sale of the U.S. annuity business. He says the capital also will help strengthen Sun Life’s balance sheet.

“We’re not in a hurry to deploy it,” Connor says. Given the widespread uncertainty facing markets worldwide, he likes the idea of having some extra cash on hand: “At this stage in the cycle, having a stronger balance sheet is actually a nice place to be.”

The capital also could be used to fund some smaller acquisitions, Connor says. Innes suspects that any acquisitions Sun Life makes will be within the traditional life insurance space and could be in Asia, such as the Aviva deal in Malaysia.

In the Canadian market, Sun Life is funnelling more resources into its career advisor force. The firm added 100 advisors in 2012, and Connor hopes to continue this pace of expansion – even though it takes substantial resources to attract and train this volume of new recruits.

Independent advisors also are an important distribution channel for Sun Life – especially in the individual life insurance market, Connor says: “We’ve really increased our market share in insurance in Canada, and that has been helped by rapid growth in the third-party channel.”

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