Sun Life CEO Bets on Smaller Acquisitions for Growth

Sun Life Financial Inc. (SLF) rallied 40 percent last year as investors rewarded decisions to shed riskier assets and emphasize insurance and wealth management. Chief Executive Officer Dean Connor says the narrower focus can still boost earnings in 2013.

“This is a transformational change for Sun Life that substantially de-risks the company, strengthens our balance sheet and provides funding for smaller acquisitions that can move our strategy forward,” Connor said in an e-mail interview yesterday.
Enlarge image Sun Life Financial Inc. Chief Executive Officer Dean Connor

Sun Life Financial Inc. Chief Executive Officer Dean Connor said, “I think investors appreciate the clarity of the strategy and the speed of execution.” Photographer: Norm Betts/Bloomberg

Canada’s third-largest insurer agreed to sell its U.S. annuities unit to a firm owned by Guggenheim Partners LLC for $1.35 billion in December, reducing risks from exposure to U.S. equity markets while focusing on its North American benefits and wealth-management business and growing in Asia.

The divestitures helped send the stock to its best gains since the Toronto-based company soared 189 percent in 2000, its first year as a public company. It was the third-best performing North American insurance stock and the best Canadian financial stock in 2012.

“The challenge will be to grow their earnings,” said Ian Nakamoto, director of research with MacDougall MacDougall & MacTier Inc. in Toronto, which manages about C$4 billion ($4.1 billion), including Sun Life shares. “I’m not sure if they’ve got the capital to do something with the profit from the Guggenheim deal. Will they make acquisitions or will they plow it back into their existing line of business? They need to do something to balance out the fact that there will be less revenue from their risk assets.”
Growth Challenge

Sun Life rose 0.5 percent to C$27.14 at market close in Toronto.

Sun Life’s earnings have been volatile in recent years as global capital markets have fluctuated. Exposure to U.S. annuities increased obligations to clients as stock markets plunged during the financial crisis, while the lowest interest rates in at least half a century makes it harder for insurers to generate profit on funds backing policies.

The company recorded a net loss of C$300 million in 2011, down from a high of C$2.22 billion in 2007. Revenue was C$22.6 billion last year from C$27.6 billion in 2009. Sun Life will report profit of C$1.46 billion, or C$2.43 a share, for 2012, according to the average estimate of analysts surveyed by Bloomberg. Revenue is estimated at C$20.3 billion.
Rising Rates

Earnings will be reduced by about 22 cents a share in 2013 after the sale of the annuities business, the company said. While the business generated 10 percent of Sun Life’s earnings, it also produced 50 percent of its equity risk and 35 percent of its interest risk, said Connor, who took over as CEO in December 2011.

“We see good organic opportunities in each of our four pillars of growth -- Canada, U.S. group benefits and voluntary benefits, asset management and Asia,” Connor said in the e- mail. “I think investors appreciate the clarity of the strategy and the speed of execution.”

Sun Life shares outpaced Manulife Financial Corp. (MFC) and Great-West Lifeco Inc. (GWO), the largest and second-largest Canadian insurers and was third in the North American market, behind American International Group Inc. (AIG) and Allstate Corp. (ALL)

Rising interest rates will lead to higher returns for Sun Life because of its fixed-income heavy portfolio, Craig Fehr, Canadian market strategist with Edward Jones & Co., said on the phone from St. Louis. Bank of Canada Governor Mark Carney reiterated Dec. 4 that he may raise interest rates as the economic expansion progresses, though economists do not expect an increase from the 1 percent benchmark rate in 2013, according to a Bloomberg survey.
Wake-up Call

Fehr rates the stock a buy, as does TD Newcrest Inc., while Credit Suisse rates it outperform, the equivalent of a buy. Eleven analysts say hold the stock and three say sell, according to ratings compiled by to Bloomberg.

Not all analysts have applauded Sun Life’s moves away from capital markets. Manulife will replace Sun Life as the best- performing insurer in Canada in the next six months as assets tied to global growth gain in the new year, said Bob Decker, who manages investments in financial companies at Aurion Capital in Toronto.

“The removal of some of the growth component of Sun Life was a wake-up call that this is a structurally different business than it used to be and quite difficult to grow in an environment of low interest rates,” Decker said in a phone interview. “2013 should be different because interest rates are going to rise and we’ll see a strong rally in equity markets. Sun Life may miss out on the benefits of that.”
Hedging Instead

Aurion, which manages about C$5.5 billion, sold its Sun Life shares around the time of its U.S. annuities sale. The insurer’s stock slipped 3.9 percent on Dec. 17 when the deal was announced. Decker manages Manulife shares.

Manulife has aggressively hedged its exposure to equity markets and interest rates, achieving hedging targets two years ahead of a 2014 goal last quarter.

“Unfortunately Sun Life can’t go right back to their acquisitive ways once they’ve signaled to the market that they’re shedding riskier businesses,” Decker said.

The sale of the U.S. annuities business, which Connor said is expected to close in the second quarter of 2013, will leave them with about C$1.9 billion in cash at its holding company following the transaction.
Right Acquisitions

Sun Life doesn’t “need acquisitions to grow,” Connor said. The company expanded its asset management capabilities in China in 2012 with the creation of Sun Life Everbright Insurance Asset Management Co. and created a new life insurer in Vietnam, PVI Sun Life, in partnership with PVI, a property and casualty insurer in the country.

“But the right acquisitions can also create value for shareholders,” he said. The company made a small acquisition in the Philippines in 2011 that included a bank distribution relationship. “The first full year of sales and profitability are encouraging.”

In Canada, the company has positions in group benefits and pensions and individual insurance. MFS Investment Management, the company’s Boston-based asset-management subsidiary, “is firing on all cylinders” with a record US$303 billion under management as of the third quarter, Connor said.

Sun Life will boost profit from acquiring wealth management units in deals under C$500 million, according to Peter Routledge, analyst at National Bank Financial.
Drank Kool-Aid

“I hope they stay away from the U.S. and invest in Canadian wealth management assets,” he said in a phone interview from Vancouver. “Everyone drank the Kool-Aid that ‘we have to be a big North American life insurer, get our name on a football stadium’ and Connor was unsentimental when he came on board. And in the end it worked to the company’s benefit.”

Sun Life needs to rely on acquisitions and wealth management for growth since the “best-case scenario” for life insurance companies right now is a rate hike in mid-2014, Routledge said.

“I don’t think there will be many headlines coming out of the company next year -- and that’s a good thing,” Nakamoto said. “Investors will be worrying less about the stock. This year was about setting the course and next year will be keeping on that course.”