Sun Life To End Variable Annuity, Life Sales In U.S.

December 14, 2011 by Fran Lysiak

Canada-based Sun Life Financial Inc. said it will stop selling its variable annuities in the United States, as of Dec. 30. Additionally, Sun Life will stop selling individual life insurance products in the United States. Those decisions were reached after a “major strategic review” of its businesses, the company said.

Sun Life (TSX/NYSE: SLF), one of Canada’s three largest insurers, said the decisions are based on “unfavorable product economics, which, due to ongoing shifts in capital markets and regulatory requirements, no longer enhance shareholder value.” The decision reflects Sun Life’s “intensified focus on reducing volatility” by shifting money to businesses “with superior growth, risk and return characteristics.”

In the third quarter, Sun Life ranked 13th in sales of variable annuities in the United States, with year-to-date sales of these retirement savings and income products of $2.3 billion, according to LIMRA and the Insured Retirement Institute/Morningstar. This represented 2% share of industry sales year-to-date.

Sun Life’s new President and Chief Executive Officer Dean A. Connor, said in a statement that Sun Life “will be repositioned to accelerate growth, improve return on shareholders’ equity and reduce volatility by concentrating its future growth” in four key areas.

These include focusing on group insurance and voluntary benefits in the United States; continuing to build on its leadership in Canada in insurance, wealth management and employee benefits; strengthening its competitive position in Asia and supporting continued growth in MFS Investment Management, and broadening Sun Life’s other asset-management businesses worldwide.

“Today begins a new chapter in the history of Sun Life Financial,” Connor said.

Last month, A.M. Best Co. downgraded the issuer credit ratings to aa- from aa and affirmed the financial strength rating of A+ (Superior) for the core life insurance subsidiaries of Sun Life Financial, which consist of Sun Life Assurance Company of Canada, Sun Life Assurance Company of Canada (U.S.), Sun Life Insurance and Annuity Company of New York, and Sun Life and Health Insurance Co. (U.S.). Concurrently, A.M. Best downgraded the ICR to a- from a of Sun Life Financial and the existing debt ratings of the enterprise (Best’s News Service, Nov. 28, 2011).

The ICR downgrades reflected SLF’s reduced earnings trends given its continued exposure to equity market and interest rate sensitivity. The heightened volatility in equity markets and low interest rates have negatively impacted SLF’s results reported under the Canadian version of the IFRS, especially in its U.S. operations. This was exemplified by SLF’s third-quarter earnings, in which a loss of C$621 million (US$610 million) was recorded, Best said.

Under the Canadian mark-to-market accounting regime, the future impact of equity market and interest rate levels measured at the close of the quarter are present valued and reflected in the current period income. SLF is exposed to interest rate and equity markets through its insurance and wealth management, and to a lesser extent, its asset management operations (Best’s News Service, Nov. 28, 2011).

Donald A. Stewart, former CEO of Sun Life since 1998, retired on Nov. 30. Connor, formerly chief operating officer, was named new president and a member of the board of directors, and took over as CEO and president on Dec. 1.

“To achieve growth in the U.S., we will focus on increasing sales in our employee benefits business, which is already a top 10 player, and will expand our presence in the growing voluntary benefits segment,” Connor said. “We are confident that with the focused investment announced earlier this year we can build leading positions in these two sustainable, less capital-intensive businesses.”

Last month, for example, the employee benefits group division of the U.S. businesses of Sun Life, based in Wellesley, Mass., announced an agreement with U.S.-based health insurer Cigna (NYSE: CI) where Sun Life would market its medical stop-loss insurance through Cigna’s relationships with third-party administrators.

Meanwhile, Sun Life’s competitor, Canada life insurance giant Manulife Financial Corp., reported a third-quarter net loss of C$1.27 billion on “substantial declines” in equity markets and interest rates, and took a C$900 million hit associated with hedging the guarantees on its variable annuities. Manulife (TSX/NYSE/PSE: MFC) also operates in the United States through its Boston-based John Hancock business (Best’s News Service, Nov. 3, 2011).

The markets saw “exceptional” equity market volatility and were impacted by monetary policy actions that lowered long-term Treasury rates in the United States and elsewhere, Manulife said at that time.

The estimated one-time cost for discontinuing these products is about $75 million to $100 million, pretax, part of which will be recorded in the fourth quarter, with the rest expected to be charged to income in 2012, Sun Life said. As of Sept. 30, there was $97 million of goodwill associated with the variable annuity business of Sun Life’s U.S. business, which will likely be written down as part of its decision to stop sales of these products.

(By Fran Matso Lysiak, senior associate editor, BestWeek: fran.lysiak@ambest.com)

Originally Posted at InsuranceNewsNet on December 12, 2011 by Fran Lysiak.