SLF Sells US Unit; DBRS Yawns; Moody's to Review-Positive

Sun Life Financial has announced:

the execution of a definitive agreement whereby Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners, will purchase Sun Life’s domestic U.S. annuity business and certain life insurance businesses for a base purchase price of US$1.35 billion, as adjusted to reflect the performance of the business through closing.

The transaction is expected to close by the end of Q2 2013 subject to regulatory approvals and customary closing conditions.

Dean A. Connor, President and Chief Executive Officer, Sun Life Financial, stated, “This transaction represents a transformational change for Sun Life. It significantly advances our strategy of reducing Sun Life’s risk profile and earnings volatility, focuses our U.S. operations on our areas of greatest strength and opportunity, and crystallizes future earnings and capital releases that will further support our growth and shareholder value creation. It also transfers this business to a financially strong buyer that understands and is committed to the annuity and life insurance sectors, which will benefit customers and the outstanding employees who will continue to support them.”

Sean B. Pasternak of Bloomberg points out:

Asset managers such as Guggenheim, Apollo Global Management LLC (APO) 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. (HIG) and Genworth Financial Inc. (GNW) 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.

That’s what Hymas Investment Management needs to do to get assets in the door! Buy them!

DBRS has announced that it:

has reviewed the announcement made by Sun Life Financial Inc. (SLF or the Company, senior rating of AA (low)) of its decision to sell the Sun Life Assurance Company of Canada U.S. subsidiary (SLA (US)) to Delaware Life Holdings, a company owned by shareholders of Guggenheim Partners, for a base purchase price of US$1.35 billion, as adjusted to reflect the performance of the business through closing. There are no implications for the current ratings at this time, most of which remain Under Review with Negative Implications, where they were placed on September 7, 2012.

SLA (US) houses the Company’s U.S. fixed and variable annuity business, as well as certain institutional life insurance lines including variable life insurance. In total, the business represents between 10% and 15% of the Company’s normalized earnings and a similar percentage of balance sheet assets (between $30 billion and $40 billion). However, the business also accounted for much of the earnings volatility experienced by the Company over the past five years, brought on by deteriorating credit market conditions and equity market volatility.

Since the Company announced its decision in late 2011 to cease writing most of the products housed in SLA (US), DBRS has expected that a review of options such as that announced today was possible, if only to de-risk the Company in the event of further capital market deterioration. Correspondingly, exposure to equity markets following the closing of this sale transaction is estimated by the Company to fall by 50%, and exposure to lower interest rates by 35%. DBRS notes that despite imperfect hedges, the Company had already been given credit for satisfactorily managing these risks.

In September 2012, following, but not in response to, the Company’s decision to de-risk its U.S. business, DBRS put the ratings of the Company and its affiliates Under Review with Negative Implications. The purpose of this review was to stand back from the specific financial performance of the Company and to put it into context vis-à-vis the ratings of SLF’s peer group and broader developments in the Canadian life insurance industry. DBRS remains concerned about the strategic position of the industry in a difficult economic environment. Over the past year, SLF has become more concentrated on its successful Canadian franchise. Strategic initiatives in Canada could well continue to support the Company’s core profitability. However, DBRS has yet to be convinced that the Company’s earnings projections for other businesses will be achieved in line with SLF’s proposed schedule.

The September review by DBRS was reported on PrefBlog.

Sun Life Financial was put on Outlook Negative by S&P last February, where it remains.

Moody’s has announced:

has downgraded to Baa2 from A3 the insurance financial strength (IFS) rating of Sun life Assurance Company of Canada (U.S.) (Sun Life US), the wholly-owned U.S. life insurance subsidiary of Sun Life Financial Inc. (TSX; SLF: preferred stock at Baa3 (hyb) review for possible upgrade ). The rating was also placed on review for further possible downgrade. In the same rating action, the Baa1 senior secured debt rating of Sun Life Financial Global Funding III, L.P. (SLFGF III) was placed under review with direction uncertain. Moody’s also affirmed the Aa3 IFS rating of SLF’s Canadian insurance subsidiary, Sun Life Assurance Company of Canada (SLA), and the ratings of other Canadian affiliates, with the outlook for the Canadian ratings (excluding SLF) remaining negative. Finally, the rating agency placed SLF’s preferred stock Baa3 (hyb) rating on review for possible upgrade.

The sale of Sun Life US will — once completed — alleviate the rating agency’s concerns related to the execution risks of the runoff strategy for the U.S. businesses and that any further charges arising from Sun Life US’ closed blocks would remain a drag on SLF’s and possibly SLA’s earnings and capital generation. “Moody’s views the transaction as credit positive for SLA as it eliminates the potential for additional capital support being needed at Sun Life US, which is the primary driver of the negative outlook” said Vice President and Senior Credit Officer, David Beattie. Moody’s expects to resolve the negative outlook on the Aa3 IFS ratings of SLA and other Canadian-affiliated companies upon closing of the transaction and the elimination of the runoff business risk.

Moody’s has had the Negative Outlook in place since January.

SLF has a lot of preferreds outstanding: SLF.PR.A, SLF.PR.B, SLF.PR.C, SLF.PR.D and SLF.PR.E (DeemedRetractible) as well as SLF.PR.F, SLF.PR.G, SLF.PR.H and SLF.PR.I (FixedReset). All are tracked by HIMIPref™ and all are assigned to the indices noted.

One Response to “SLF Sells US Unit; DBRS Yawns; Moody's to Review-Positive”

  1. […] Life Financial’s sale of its US annuities book met a small positive response from the Credit Rating Agencies. Now, SLF has announced: On December 17, 2012, Sun Life Financial Inc. (TSX: SLF) (NYSE: SLF) […]

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