Annuity Business Sold For $1.35 Billion By Sun Life Financial Inc. (USA)(NYSE:SLF) – GOF

by Fiona Gabriel | Wednesday, Dec 19, 2012 | 545 views

The price of Sun Life Financial Inc. (USA)(NYSE:SLF) share fell by 2.5%, on Monday as the company announced their deal with the Guggenheim Strategic Opportunities Fund(NYSE:GOF) Partners, in which Sun Life Financial Inc. (USA)(NYSE:SLF) sold its main annuity – income generating business for $1.35billion. Guggenheim Strategic Opportunities Fund(NYSE:GOF) Delaware Life Insurance Co. will take over this business. Guggenheim Strategic Opportunities Fund(NYSE:GOF), a New York company with $160 billion in assets won the bid for the Sun Life Financial Inc. (USA)(NYSE:SLF) deal from at least two other companies, in Nov.

The reasons that led to this deal can be traced back to the 2008 crisis in the U.S. Sun Life Financial Inc. (USA)(NYSE:SLF) is the 3rd largest insurance company of Canada. Last year, it started concentrating on group insurance and benefit schemes in the U.S. It stopped selling individual policies and annuities. The annuities mostly invest in retirement schemes, which we know defaulted big time in the wake of the crisis and caused major earnings loss to Sun Life Financial Inc. (USA)(NYSE:SLF). The annuities guarantee a minimum earning to the investor every month. The interest rates were very low and the Canadian policy ruled that insurers take responsibility of losses from the word go. All this combined with weak markets and low yields on bonds further added to the tumbling profits of Sun Life Financial Inc. (USA)(NYSE:SLF). It had major losses in 2011 and profits were down 87.5% in 2012.

This strategy did help Sun Life Financial Inc. (USA)(NYSE:SLF) in improving its sensitivity towards risk factors and the related volatility in its earnings. In the equity market, its sensitivity was reduced 50% and in the sensitivity towards interest rates, was reduced by 35%, as compared to what it was in September before the takeover. However, the company’s book value has been reduced more than what was expected. Looking back, one would feel that the sensitivity issues were really not that bad to take such a big move, said Robert Sedran CIBC analyst on world markets.The deal did improve Sun Life Financial Inc. (USA)(NYSE:SLF)cash flow by $1.9billion, but the share fell 2.5%.

The only upside one sees, according to Sedran, is this will free up resources that were being unnecessarily being held up to service a business that was an annuity and hence closed.

The advisor to Sun Life Financial Inc. (USA)(NYSE:SLF) on this deal is Morgan Stanley. The deal will be complete towards the last part of next year.

The Sun Life Financial Inc. (USA)(NYSE:SLF) share were down by 2.06% to close at $26.62
The shares of Guggenheim Strategic Opportunities Fund(NYSE:GOF) were up by 0.39% to close at $21.83.

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