Sun Life Financial Inc., the second-largest group-benefits provider in North America, is financing toll roads and bridges to boost investment income and counter lower yields on publicly traded debt.
The private loans are typically as much as C$250 million ($243 million), Sun Life Chief Executive Officer Dean Connor said in a March 8 interview at Bloomberg headquarters in New York. The Toronto-based insurer is looking for investments that give it more of a spread, the difference in yield over Canadian Treasuries.
“They’re individually negotiated, very spready assets,” Connor said. “There aren’t many people in Canada originating these deals.”
Connor, 56, who took over the top spot at Sun Life in December 2011, is focusing on what he calls “four pillars of growth” -- insurance in Canada; group coverage and voluntary benefits in the U.S.; asset management; and expansion in Asia. He said private loans can bolster results.
“We see a lot of opportunity, and that’s part of the business that we’re trying to grow,” Connor told Bloomberg Television’s Erik Schatzker in an interview to be aired today. “We’re looking at other markets around the world -- Europe, Australia, the United States -- other markets around the world to source these kinds of business.”
MetLife Inc., the largest U.S. life insurer, said today that it invested about $8.1 billion in private-placement loans last year, primarily in the U.S., U.K., Europe and Australia. That compares with $8.8 billion in 2011, the New York-based firm said.
“Private-placement activity remained strong in 2012,” said Scott Inglis, global head of MetLife Private Capital Investors. The deals include corporate, infrastructure and tax-credit investments, New York-based MetLife said.
Sun Life, owner of Boston-based money manager MFS Investment Management, has increased holdings of Canadian provincial and municipal bonds, as well as high-yield debt. Canadian provincial bonds yield 2.6 percent compared with 2.4 percent for Bank of America Merrill Lynch’s Canada Broad Market Index, which tracks $1.4 trillion of government and corporate securities.
“We’re probably tapped out” on provincial-bond increases, Connor said. “We’re getting close to the maximum exposure we’d like to have in that category.”
Sun Life agreed in December to sell its U.S. annuities business to a firm owned by Guggenheim Partners LLC shareholders for $1.35 billion to reduce the insurer’s equity risk by about 65 percent and interest-rate risk by about a third. The sale follows moves by Leon Black’s Apollo Global Management LLC and other private-equity firms, betting on a rebound in the annuities business.
“We’ve significantly de-risked,” Connor said. “We want people to buy our stock not as a call option on the S&P 500, but because they believe in these four pillars.”
Sun Life fell 0.7 percent to C$28.43 at 4:03 p.m. in Toronto. The shares climbed 35 percent in the last 12 months through March 8, the most among the six-company Standard & Poor’s/TSX Life & Health Insurance Index.
Selling the U.S. business is Connor’s “number one achievement,” said Ian Nakamoto, director of research at MacDougall, MacDougall and MacTier Inc. in Toronto.
“This lessens, though does not eliminate, the risk of lower long-term interest rates and lower equity markets,” said Nakamoto, whose firm manages about C$4 billion, including Sun Life shares. “I believe he has made a good first step to right-size the company.”
Sun Life projected a year ago that annual operating income would be C$2 billion by 2015. The insurer said this year that 2013 earnings would be reduced by about 22 cents a share because of the annuities-unit sale.
“It’s going to take us time to close that gap,” Connor said.
Fitch Ratings said in January it has a negative outlook on Sun Life on the prospect that “earnings will remain volatile,” and that the insurer’s ability to improve run-rate earnings “will depend in part on how the company deploys the proceeds from the sale.” The ratings firm said its main concern is that an “ill-timed or poorly executed acquisition would negatively impact operating earnings and debt-service coverage.”
Sun Life may look at acquisitions and “recapturing” business it sold during the financial crisis in a reinsurance deal, Connor said. The company isn’t considering stock repurchases, he said.
Acquisitions may be “more likely” in Asia than other regions, Connor said. Sun Life’s roots in the region date back to 1892, with operations in markets including Hong Kong, India, China and Malaysia.
Following the U.S. annuities sale, Asia will account for as much 14 percent of Sun Life total profit, Connor said. It will have to reach 15 percent to 20 percent “to be relevant to investors,” he said.
“What we want to do is grow sales forces, grow bank partnerships, grow products, grow the group business, grow the benefits business” in Asia, Connor said.