SLF Completes Sale of US Annuities Unit

Sun Life Financial has announced:

that it has completed the sale of its domestic U.S. annuity business and certain life insurance businesses to Delaware Life Holdings, LLC, which was announced last December.

Updated information regarding the financial impact of the sale and Sun Life Financial’s 2015 financial objectives will be included in the Company’s second quarter financial disclosure, which is scheduled to be released after markets close on Wednesday, August 7, 2013.

“The completion of this transformational transaction significantly reduces Sun Life Financial’s risk profile and earnings volatility,” said Dean Connor, President and CEO. “Our U.S. operations are now focused on our successful employee benefits business and our voluntary benefits business, which have achieved substantial growth during the past two years. We are also continuing to support growth in MFS Investment Management, our highly successful U.S.-based asset manager, which has more than US$350 billion of assets under management globally.”

“We are pleased to transfer this business to a buyer who is committed to customers and the approximately 500 outstanding employees who will continue to support them,” he said.

The transaction includes the sale of 100% of the shares of Sun Life Assurance Company of Canada (U.S.), which includes Sun Life Financial’s domestic U.S. variable annuity, fixed annuity and fixed index annuity products, corporate and bank-owned life insurance products and variable life insurance products.

DBRS comments:

There are no rating implications as DBRS’s ratings of Sun Life already incorporate the completion of this sale.

This continues a trend in the US insurance business:

Investment firms are pursuing annuity deals to add assets, betting they can manage the funds more skillfully. Philip Falcone’s publicly traded Harbinger Group Inc. (HRG), which bought a life and annuity business in 2011, and Apollo Global Management LLC (APO)’s Athene arm, which agreed in December to buy Aviva Plc (AV/)’s U.S. life and annuity unit, were also being reviewed by Lawsky’s office, a person with knowledge of the matter said in May.

Guggenheim Partners, run by Chief Executive Officer Mark Walter, has expanded from a family office with a handful of employees into a $180 billion global asset manager through deals including the acquisitions of Claymore Group and Rydex ETF owner Security Benefit Corp.

Walter, who shot to prominence as the man behind the $2 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 DFS honcho highlighted the trend in April:

If you look at the deals completed or announced to date, private equity-controlled insurers now account for nearly 30 percent of the indexed annuity market (up from 7 percent a year ago) and 15 percent of the total fixed annuity market (up from 4 percent a year ago).

There can be exceptions, but generally private equity firms follow a model of aggressive risk-taking and high leverage, typically making high-risk investments. If just a few of these investments work out, then the firm can be very successful – and the failed ventures are just viewed as a cost of doing business.

This type of business model isn’t necessarily a natural fit for the insurance business, where a failure can put policyholders at sigifnicant risk.

Private equity firms typically manage their investments with a much shorter time horizon — for example, 3-5 years — than is typically required for prudent insurance company management. They may not be long term players in the insurance industry and their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.

Now, at DFS, we regulate both banks and insurance companies. And the differences between these two industries are quite striking when it comes to private equity investments.

Private equity firms rarely acquire control of banks, not because they are prohibited from doing so, but because the regulatory requirements associated with such acquisitions are more stringent than a private equity firm may like. These regulatory requirements in the banking industry are designed – in part – to encourage a long-term outlook, and ensure that the person controlling the company has real skin in the game.

The long term nature of the life insurance business raises similar issues, yet under current regulations it is less burdensome for a private equity firm to acquire an insurer than a bank.

We need to ask ourselves whether we need to modernize our regulations to deal with this emerging trend to protect retirees and to protect the financial system.

Approval from the New York Department of Financial Services did not come without a price:

The key heightened policyholder protections to which Guggenheim agreed include:
  • Heightened Capital Standards. Guggenheim will maintain Sun Life New York’s Risk-Based Capital Levels (RBC Levels) at an amount not less than 450 percent. (Capital serves as a buffer that insurers use to absorb unexpected losses and financial shocks – better protecting policyholders.)
  • Backstop Trust Account. Guggenheim will establish a separate backstop trust account totaling $200 million to provide additional protections to policyholders above and beyond the heightened capital levels. If Sun Life New York’s RBC levels fall below 450 percent, the funds in the backstop trust account will be used to replenish (“top up”) Sun Life New York’s RBC levels to at least 450 percent. The $200 million in the trust account will be held separately from other Sun Life New York funds for at least seven years and dedicated to the sole purpose of protecting policyholders.
  • Enhanced Regulatory Scrutiny of Operations, Dividends, Investments, Reinsurance. Any material changes to Guggenheim’s plans of operations of Sun Life New York, including investments, dividends, or reinsurance transactions will require the prior written approval of DFS.
  • Stronger Disclosure and Transparency Requirements. Sun Life New York will file quarterly RBC level reports to DFS – rather than just the annual reports required under New York Insurance Law. Additionally, the insurer will disclose to DFS necessary information concerning corporate structures, control persons, and other information regarding the operations of the company.

450% is a huge level of RBC compared to the standard:

There are five outcomes to the RBC calculation which are determined by comparing a company’s Total Adjusted Capital to its Authorized Control Level Risk-Based Capital. The level of required risk-based capital is calculated and reported annually. Depending upon the level of the reported risk-based capital, a number of remedial actions, if necessary, are available as
follows:
  • 1. No action: Total Adjusted Capital of 200% or more of Authorized Control Level results in “no action.”

Sun Life’s 2012 Annual Report states:

Our principal operating life insurance subsidiary in the United States, Sun Life (U.S.) is part of our Discontinued Operations. Sun Life U.S. is subject to the risk-based capital (“RBC”) rules issued by the National Association of Insurance Commissioners, which measures the ratio of the company’s total adjusted capital to the minimum capital required by the RBC formula. The RBC formula for life insurance companies measures exposures to investment risk, insurance risk, interest rate risk and other market risks and general business risk. A company’s RBC is normally expressed in terms of the CAL. If a life insurance company’s total adjusted capital is less than or equal to the CAL (100% of CAL or less), a comprehensive financial plan must be submitted to its state regulator. Sun Life (U.S.) has established an internal target range for its RBC ratio of 300% to 400% of the CAL.

I am not opposed in principle to higher capital requirements for companies that have less skin in the game than a regular insurer (in which all the sales profits will disappear if the investment side blows up) … but 450% plus a trust-fund buffer? One wonders how the DFS arrived at that figure.

SLF has the following preferred shares outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) and SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and assigned to their respective indices.

One Response to “SLF Completes Sale of US Annuities Unit”

  1. […] of Aviva’s US unit to Apollo has been approved with substantially the same conditions as the Sun Life – Guggenheim deal: The key heightened policyholder protections to which Apollo agreed […]

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