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Variable Annuity Business Changing Hands

UPDATE #3: February 9, 2013

I’ve been updating the story on Sun Life Financial’s sale of their U.S. annuity business for months now and just came across some more information on the sale.  Investment Executive’s Megan Harman talks about how the company’s “Sale of U.S. annuity business reflects firm’s strategy to shift away from non-core businesses.”  The $1.35 billion sale to Delaware Life Holdings, part of Guggenheim Partners LLC, is likely to be finalized next quarter.  The company’s annuity business only accounted for 10% of their earnings, but held half of the company’s equity market risk and 35%k of their interest rate risk.

All variable, fixed, and equity indexed annuities will be sold in the deal, so that Sun Life can take away a huge chunk of their risk.  Low interest rates have nearly killed the profitability of Sun Life because as a Canadian company, they have higher capital requirements than their U.S. competitors.  Canadian annuity products are not as risky to insurers because their guarantees are not as strong.  Their products did not get as risky or as generous as the variable annuity guarantees in the U.S.  Even though the guaranteed minimum withdrawal benefits (GMWB) in Canada are much thinner than those in the U.S., Sun Life is even halting sales of those in their home country.  They are confident that all of the changes they have made with their annuity offerings are in the best interest of the company.

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UPDATE #2: December 25, 2012

Reuters knew what they were talking about when they reported that Guggenheim Partners was likely to buy Sun Life Financial’s variable annuity business.  The deal is worth $1.35 billion, even more than the original estimate.  Insurance Networking News published Sean B. Pasternak, of Bloomberg News’s, article “Sun Life Selling U.S. Unit for $1.35 Billion to Guggenheim” detailing the sale.  Sun Life had Canada’s highest performing financial stock last year, partly because they were selling their annuity business in the U.S. to help the equity of their shareholders. 

Delaware Life Insurance Co. will be the new name for the annuity business, but Guggenheim will still provide the investment management.  Sun Life wasn’t happy with their return on capital related to the annuity markets in the U.S. and felt it was in the best interest of their shareholders to sell the business.  Low interest rates and low stock markets have made it more difficult for insurance companies to make money off of annuities, so Sun Life isn’t the only insurer selling some of their obligations. Guggenheim is an asset manager who bought the business on the assumption that they can invest the funds and get a better return than their obligation of annuity payouts in the future.

 

UPDATE #1: November 16, 2012

It looks like Sun Life Financial might have a buyer for their U.S. variable annuity and life insurance business.  Reuters is reporting that Guggenheim Partners is the likely buyer in an estimated $1 billion deal.  In Jessica Toonkel’s article, “Exclusive: Guggenheim in lead for $1 billion Sun Life Unit,” she reports that Resolution Group and JC Flowers appear to have dropped out of the running.  No one wanted to go on the record from any of the involved businesses, but sources have said that Guggenheim is the only company still in talks with Sun Life.

They announced in December that they were no longer going to offer variable annuities or individual life insurance in the United States.  Variable annuities put a strain on insurers because of their guarantees paired with recent low interest rates and volatile markets.  In Canada, insurers have to take their losses immediately, even if the financial payouts will not happen for years to come.  This made it difficult for Sun Life to continue operating their annuity business in the U.S.  Competitors in the United States are able to spread their losses over many years to wait for potential interest rate and market increases.  We’ll continue to update you on Guggenheim’s bid for Sun Life’s variable annuity business.

 

Nearly a year ago, Sun Life Financial out of Canada stopped selling variable annuities and life insurance in the United States.  They are now looking to sell their existing variable annuity business, according to Bloomberg.  In “Sun Life Said to Seek Buyer for U.S. Annuities Unit,” Zachary R. Mider says that Morgan Stanley is helping Sun Life find a company to purchase their existing variable annuity accounts.  One of the companies said to be showing interest is Guggenheim Partners LLC.  The asset management company has bought other insurers’ annuity business in order to gain funds for their own investment management.  Companies like Apollo Global Management LLC and Harbinger Capital Partners LLC have made similar annuity purchases.

Some people are saying that Sun Life’s variable annuity business could go for around $1 billion.  One strategist said the course being taken by Sun Life is a big reflection of what is going on in the insurance industry in general.  Due to the overall environment, insurance companies are working hard to manage their risk and Sun Life didn’t think it was able to do that while still maintaining their variable annuity business.

Sun Life’s shares in the Canadian S&P/TSX Life Insurance Index have gone up 31% this year, since their announcement that they were planning to exit the variable annuity and life insurance markets in the U.S.  They are focusing their business ventures in Canada and China instead.  They are still working in the U.S. in the group and voluntary benefits business.  If they sell their variable annuity business, Sun Life will reduce their return on equity volatility as well as their capital requirements.  Variable annuities can be tricky for insurance companies because the regular payments vary based on underlying markets.  Those who are successful in selling variable annuities have successfully balanced their risk with their income payouts.  Most of the annuity business being sold is that of fixed annuities, which is what Aviva Plc is trying to sell currently in the U.S.  Those asset management firms looking to gain annuity business have quite a few choices right now from insurance companies looking to sell.

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