Sun Life sells U.S. annuity business, shares drop

Sun Life Financial Inc will sell its U.S. annuity business for $1.35 billion to a firm connected to Guggenheim Partners in a deal that should reduce the exposure of the insurer's earnings to market swings and boost its cash levels.

While the deal could bring long-term benefits to Sun Life, whose earnings have been derailed by wild market swings during recent years, investors pulled the company's shares down by nearly 4 percent as the financial terms fell short of initial expectations.

"The stock's sort of correcting back because the deal isn't quite as big a windfall as I think the market was anticipating," said National Bank financial analyst Peter Routledge.

Delaware Life Holdings, owned by certain Guggenheim clients and shareholders, will rename itself Delaware Life Insurance Co following the cash purchase. Guggenheim will provide investment management services to the new company.

Sun Life, Canada's No. 3 insurer, said last year it would stop selling variable annuities and individual life products in the United States to focus more on group insurance and voluntary benefits.

Variable annuities - retirement products that guarantee the investor a minimum monthly payment - became a source of earnings volatility for Sun Life in the wake of the 2008 financial crisis. That is because low interest rates and Canadian accounting rules force insurers to take upfront losses on products that will not come due for years.

"The business makes money, but not enough," said Routledge.
Weak equity markets and low bond yields sent Sun Life's profit down 87.5 percent during the second quarter of 2012 and caused losses during the third and fourth quarters of 2011.

EARNINGS HIT
The deal will cut Sun Life's profit by 22 Canadian cents a share annually and reduce book value by C$950 million ($965 million), the company said in a statement. According to Thomson Reuters I/B/E/S, Sun Life was expected to earn C$2.53 a share on a net basis in 2013.

The deal has also prompted Sun Life to take a second look at its 2015 financial targets, which include a goal of C$2 billion in operating profit.

In an interview, Sun Life Chief Executive Dean Connor said he would update the market on the targets after the deal closes, which is expected during the second quarter next year.

"I'm not saying we will necessarily reduce them. I'm not saying we will necessarily leave them as they are, because we don't know yet," he said.

The deal is also expected to reduce the company's earnings sensitivity to equity markets by 50 percent and its sensitivity to interest rates by 35 percent, compared with estimates on September 30.

It will raise Sun Life's cash position to C$1.9 billion.
"Over time, we'll redeploy that cash to fund growth," said Connor. He said the growth could include acquisitions on the "smaller end of the spectrum."

Sun Life, which also owns U.S. asset manager MFS Investment Management, is targeting growth in its Asian business.

SHARES DOWN
Sun Life shares, which have outperformed its rivals with a 47 percent year-to-date rise coming into Monday's session, ended down 3.9 percent at C$26.74 on the Toronto Stock Exchange. Despite the strong rise this year, the stock still trades at less than half its all-time high set in 2007.

Robert Sedran, an analyst at CIBC World Markets, said in a research note that the earnings and book value reductions were worse than he had expected.

"Moreover, while the decline in the earnings sensitivity to market variables improves the risk-reward profile, we did not view those sensitivities as excessive to begin with," he said.

However, he said the deal will free up time and capital that would otherwise have been engaged in what is essentially a closed business, which is a positive.

Morgan Stanley & Co advised Sun Life on the transaction financials.
Law firm Debevoise & Plimpton LLP was legal adviser to Sun Life, while Skadden, Arps, Slate, Meagher & Flom advised Guggenheim Partners.