Sun Life Financial Inc. (SLF), Canada’s third-largest insurer, said a $1.35 billion agreement to sell its U.S. annuity business to a firm owned by Guggenheim Partners LLC shareholders has been delayed amid a regulatory review.
The New York State Department of Financial Services investigation into ownership of insurers by private investors postponed approval of the deal beyond the second quarter, Toronto-based Sun Life said today in a statement. The Delaware Department of Insurance and the Financial Industry Regulatory Authority have signed off on the deal, Sun Life said.
Benjamin Lawsky, superintendent of the New York watchdog, this year began a probe into deals by private-equity firms to buy insurers, saying the acquirers may make risky investments in pursuit of short-term profits. State regulators monitor insurers to make sure they have enough funds to meet obligations to policyholders.
The main risk is that a review “ends up requiring more capital being assigned to the business, which would change the buyer’s economics and could see the sale price revised lower,” Robert Sedran, an analyst at CIBC World Markets, said in a research note. “With a committed buyer and a motivated seller, we still expect this sale to be completed at some point.”
Sun Life slipped 2.2 percent to C$30.19 in Toronto trading at 4:16 p.m.
“It does worry me in a way,” John Kinsey, who helps manage about C$1 billion ($964 million) including Sun Life shares at Caldwell Securities Ltd., said in a phone interview from Toronto. “Once you do a deal, you want to close it and drive on.” Thomas Mulligan, a spokesman for Guggenheim at Sitrick and Co., declined to comment.
“We’ve made good progress and we’re working hard with the buyer and the New York regulator to clear the final hurdle,” Frank Switzer, a Sun Life spokesman, said by phone. “Once that’s done, we expect to close the deal as soon as possible.”
Sun Life has said the transaction will reduce risks and volatility in earnings. Annuities are contracts that offer guaranteed income for retirees, and stock-market swings combined with low interest rates can make it harder for insurers to generate profits on funds held to back the policies.
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:US), which bought a life and annuity business in 2011, was asked for information by Lawsky, a person familiar with the matter said last month.
Apollo Global Management LLC (APO:US)’s Athene arm agreed in December to buy Aviva Plc’s U.S. life and annuity business and is also being reviewed by Lawsky, the person said. Andrew Reid, an Aviva spokesman, said the company still expects that deal to be completed this year.
For Sun Life, the postponement “creates uncertainty that delays plans the company might otherwise have had to deploy the capital that will be raised as a result of the transaction,” Andre-Philippe Hardy, an analyst at RBC Capital Markets, said in a research note today.
Sun Life Chief Executive Officer Dean Connor, 56, has been focused 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. Insurers including Hartford Financial Services Group Inc. have also been seeking to reduce risk from annuities.
Guggenheim, run by CEO Mark Walter, has expanded from a family office with a handful of employees into a global manager of more than $180 billion in assets through deals including the acquisitions of Claymore Group and Rydex ETF owner Security Benefit Corp.
Lawsky subpoenaed the buyers to understand the risks the companies are taking on and how they’re presenting the deals to investors. The information may be used to craft new regulations, the person said. Lawksy’s office will “continue to exercise careful due diligence and oversight to protect policyholders,” Matt Anderson, a spokesman for the New York regulator, said in an e-mail.
“The risk that we’re concerned about at DFS is whether these private-equity firms are more short-term focused, when this is a business that’s all about the long haul,” Lawsky said in an April 18 speech. “Their short-term focus may result in an incentive to increase investment risk and leverage in order to boost short-term returns.”
Steven Kandarian, CEO of MetLife Inc., the largest U.S. life insurer, said last month he wants to be sure private-equity acquirers of insurers are properly regulated so that his firm isn’t forced to help support failed carriers.
“What happens, then, if the deal doesn’t work and there’s not enough capital to pay out those policyholders over time?” said Kandarian, 61. “That goes back into the state guaranty fund, and companies like MetLife and others end up picking up that tab. So obviously, we have a concern about that.”
Morgan Stanley (MS:US) was the financial adviser to Sun Life and Debevoise & Plimpton LLP provided legal counsel.
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