Sun Life Financial Inc will sell its U.S. annuity business for $1.35 billion to a unit of asset manager Guggenheim Partners in a deal that should reduce the exposure of the insurer's earnings to market swings and boost its cash levels.
Even so, shareholders pulled Sun Life's stock down by 2.5 percent on Monday after the Canadian company announced the deal, which will reduce its book value and core earnings.
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"The financial implications are more negative than we had assumed both in terms of the book value decline and the ongoing earnings impairment," CIBC World Markets analyst Robert Sedran wrote in a research note.
Guggenheim's Delaware Life Holdings unit will take on the business, which also includes some life insurance assets, and rename it Delaware Life Insurance Co.
New York-based Guggenheim, which has about $160 billion in assets under management, recently emerged as the lead bidder for the Sun Life assets, outbidding at least two other parties, sources told Reuters in November.
Sun Life, Canada's No. 3 insurer, said last year it would stop selling variable annuities and individual life products in the United States to focus more on group insurance and voluntary benefits.
Variable annuities are retirement products that guarantee the investor a minimum monthly payment.
They have become a source of earnings volatility for Sun Life in the wake of the 2008 financial crisis, because of low interest rates and Canadian accounting rules that force insurers to take upfront losses on products that will not come due for years.
Weak equity markets and low bond yields sent Sun Life's profit down by 87.5 percent during the second quarter of 2012 and caused losses during the third and fourth quarters of 2011.
The deal will cut Sun Life's profit by 22 Canadian cents per share annually, and reduce the company's book value by C$950 million ($963 million), the company said in a statement. According to Thomson Reuters I/B/E/S, Sun Life was expected to earn C$2.53 per share on a net basis in 2013.
It is also expected to reduce the company's earnings sensitivity to equity markets by 50 percent and its sensitivity to interest rates by 35 percent, compared with its sensitivities as of September 30.
"This transaction represents a transformational change to the company's business and supports our strategy of improving our risk profile and reducing the volatility of earnings," Sun Life Chief Executive Dean Connor said on a conference call.
The deal will also boost Sun Life's cash position by C$1.9 billion.
Sun Life shares were down 2.5 percent at C$27.14 on the Toronto Stock Exchange on Monday afternoon.
Sedran said the earnings and book value reductions were worse than he had expected.
"Moreover, while the decline in the earnings sensitivity to market variables improves the risk-reward profile, we did not view those sensitivities as excessive to begin with," he said.
However, he said the deal will free up time and capital that would otherwise have been engaged in what is essentially a closed business, which is a positive.
Morgan Stanley & Co advised Sun Life on the transaction, which is expected to close by the end of the second quarter next year.
(Additional reporting by Bhaswati Mukhopadhyay in Bangalore; editing by Frank McGurty and Matthew Lewis)