Sun Life Financial Inc., the best-performing financial stock in Canada this year, agreed to sell a U.S. annuity business to a firm owned by Guggenheim Partners LLC shareholders in a $1.35 billion deal to cut risks in equity markets and interest rates.
Guggenheim will provide investment management for the acquired businesses, including some life insurance assets, Sun Life said today in a statement. The business will be renamed Delaware Life Insurance Co.
“The area was dragging in terms of a return on capital and putting too much money toward that area and getting poor returns,” said Ian Nakamoto, director of research with MacDougall MacDougall & MacTier Inc. in Toronto. Sun Life “felt it wasn’t strong competitively.”
Asset managers such as Guggenheim, Apollo Global Management LLC and Harbinger Capital Partners LLC have invested in annuities operations to get access to funds for investment-management businesses. Insurers including Hartford Financial Services Group Inc. and Genworth Financial Inc. have scaled back from annuities because obligations to clients can increase when stock markets fall. Also, low interest rates make it harder for providers to generate profit on funds held to back the policies.
Annuities are contracts that offer guaranteed income for retirees. Asset managers including Apollo and Guggenheim are betting they can invest the assets at a return higher than what’s needed to service obligations.
Guggenheim Partners, run by Chief Executive Officer Mark Walter, has expanded from a family office with a handful of employees into a $160 billion global asset manager through deals including the acquisitions of Claymore Group and Rydex ETF owner Security Benefit Corp. Talks to buy parts of Deutsche Bank AG’s asset management fell apart earlier this year.
Walter, who shot to prominence as the man behind the $2.15 billion purchase of the Los Angeles Dodgers, has hired investing veterans including Henry Silverman, the former chief operating officer of Apollo, to advise on expansion.
The sale represents a “transformational change” for Toronto-based Sun Life, reducing the company’s risk, Chief Executive Officer Dean Connor said today in the statement.
The sale will reduce earnings by about 22 cents a share in 2013, the insurer said. Sun Life, Canada’s third-largest insurer, will continue to operate in the U.S. through its employee benefits and voluntary benefits businesses, as well as through money manager MFS.
Sun Life will have about C$1.9 billion in cash at its holding company following the transaction, of which it needs to hold C$800 million to C$900 million, Connor said.
“We’ll over time redeploy that cash to fund growth in our businesses,” Connor said today in a telephone interview. Sun Life will look at acquisitions that would be “measured in the hundreds of millions, not billions” of dollars he said.
Morgan Stanley was the financial adviser to Sun Life. Debevoise & Plimpton LLP provided legal counsel. Skadden, Arps, Slate, Meagher & Flom LLP said it’s representing Guggenheim.
Sun Life fell 3.9 percent to C$26.74 in 4 p.m. trading on the Toronto Stock Exchange. The shares have climbed 41 percent this year, the best performer on the 44-company S&P/TSX Financials Index.
Shares of Hartford Financial Services Group Inc., an insurer also seeking to cut liabilities tied to annuities, climbed 3.6 percent in New York after Sun Life struck its deal with Guggenheim.
The Guggenheim deal shows “there are potential buyers out there for these troubled books of business, which could open up opportunities for Hartford,” said Randy Binner, an analyst at FBR Capital Markets, in a note to investors today.