Great-West Lifeco Inc. is selling its U.S. individual life-insurance and annuity business for $1.6-billion, trading a low-growth, but stable, arm for cash that can be re-invested in higher-margin businesses.
The Canadian life-insurance company announced on Thursday that its Colorado-based subsidiary, Great-West Life & Annuity Insurance Company (GWL&A), has struck a deal to unload its individual life insurance and annuity business to Protective Life Insurance Company, the primary subsidiary of Protective Life Corporation. The deal is subject to regulatory approval.
The proposed divestiture comes after a portfolio review that started in late 2017, chief executive Paul Mahon said in an interview with The Globe and Mail. The review coincided with a broad shift across the sector, during which some insurers have placed less emphasis on their traditional life-insurance arms because of heavy capital requirements and a lack of interest from millennial customers.
“We wanted to ensure we had the right growth profile and the right balance between capital-light and capital-heavy businesses,” Mr. Mahon said of the sale. South of the border, Great-West will now focus on asset management through its Putnam subsidiary, as well as group retirement products through its Empower division.
The businesses being sold include bank-owned and corporate-owned life insurance, single premium life insurance, individual annuities, and a closed block of life insurance and annuities − or those that are no longer being actively sold to customers. In recent investor presentations, these divisions had largely been glossed over by Great-West Life executives in favour of Putnam and Empower.
Through the sale, Great-West is freeing up cash to invest elsewhere at a crucial moment. Interest rates have been rising, but stock prices for life insurers largely have not benefited − even though they are now earning higher returns on the premiums they collect and invest. Across the sector, Canadian life insurers have been trading at a weighted-average price-to-earnings multiple of 8.7 times, the lowest since the global financial crisis, and a 15-per-cent discount relative to where the Big Six banks trade, according to National Bank Financial analyst Gabriel Dechaine.
The question now is where Great-West will deploy the fresh funds. The company has long talked about doing a U.S. asset-management acquisition to add scale to its struggling Putnam Investments arm. The deal would allow the firm to spread costs over more assets, resulting in Great-West being able to lower fees.
Lately, however, there is some skepticism among analysts around the benefits of doing so. “While an acquisition could help finally turn Putnam into a profitable operation, evidence is not supportive of M&A as a driver of outperformance,” Mr. Dechaine wrote in a note to clients.
Mr. Dechaine points to two recent acquisitions that yielded disappointing stock performance subsequent to deal announcements: the 2018 deal where Invesco Ltd. bought OppenheimerFunds Inc; and the 2017 deal where Janus Capital merged with Henderson Global Investors.
The U.S. sale will generate $1.6-billion in cash, comprised of a $1.1-billion ceding commission and a capital release of $530-million. However, the business is being sold at a $93-million loss to book value and also includes $76-million of transaction costs.
While the deal, which is expected to close in the first half of 2019, will free up cash, it removes a steady business that consistently contributed about 5 per cent of the firm’s annual earnings. The businesses being sold contributed about $120-million to its net earnings for the first three quarters of 2018.
On Thursday, investors sent Great-West’s shares down 4.8 per cent. Some analysts are skeptical that the insurer will be able to deploy the money in a business that will more than offset the lost earnings.
However, share buybacks are another option − something Mr. Mahon says the company will consider. In November, rival Manulife Financial Corp. also sold off U.S. policy liabilities by reinsuring them, freeing up $1-billion in capital. Manulife then announced a 14-per-cent dividend hike as well as a buyback of up to 40 million common shares.