Friday, January 12, 2007

Sun Life Agrees to Buy Genworth's Group Benefits Business

Scotia Capital, 12 January 2007

• This definitely appears to be a low-risk deal, as Rick McKenney, SLF's CFO and formerly Genworth's CFO, knows the business and knows the people. Also, Genworth's operations are fairly close to SLF's US headquarters (just a 2 hour drive) which further limits integration risk. With over 65% of the business overlapping, we expect the company's 30% cost saves assumption is conservative, especially in group business, which tends to be fairly homogenous.

• We believe the acquisition is opportunistic. Sun Life capitalizes on a restructuring Genworth that lacked scale in the market, as well as McKenney's "internal" knowledge of the business and the people.

• The acquisition also significantly expands the company's distribution reach, adding 100 group sales representatives to its current 130 group rep sales force, and adding 7 new regional sales offices to its current 24. In addition, the company looks to open 3 new offices as a result of the deal.

• The acquisition also adds dental to the product array (approximately 26% of Genworth's group business), an important aggregator in winning new business, as well as a stronger presence in the generally more profitable small-to-mid size case market.

• The $0.05 per share accretion, excluding integration costs of US$40 million (which is likely to be charged over the course of 2007), appears to be largely based on cost saves, with little given to potential revenue synergies. Given the likelihood of potential revenue synergies we expect the ultimate accretion could be larger. The $0.05 per share accretion is expected in 2008.

• The acquisition meets an important company objective, significantly and accretively adding scale to a core operation, and efficiently utilizing excess capital. The deal increases the company's presence in the U.S. group market by over 60% and puts the company in the top 10 in all facets of group life and health insurance in the U.S., a business that is significantly scale driven. As well, the deal utilizes about one-third of the company's approximately $2 billion in excess capital. We see no threat to the company's dividend policy (increasing the payout ratio form 30% to 35%) nor to its share buyback policy (which appears to be approximately $500-$600 million in annual buybacks).

• The company indicated on the call that the US$650 all cash price tag, excluding US$65-US$70 in the present value of tax benefits, translates into about 14x the company's estimate of 2007 earnings for this business (which works out to be US$40 million, in-line with US analyst projections for this business of Genworth, from what we can gather). Including annual estimated cost saves of US$20 million (after-tax), the price translates to 10x 2007E earnings of US$60 million. After-tax profit margins on the business acquired, at around 5% of premium (2006 premium appears to be close to US$700 million) are slightly higher than Sun Life's 4%-4.5% run-rate, perhaps reflecting Genworth's mid-to-small case focus, traditionally more profitable than Sun Life's mid-to-large case focus. We expect Sun Life's earnings in 2008 in U.S. group insurance will increase from US$55 million to over US$115-$120 million, excluding the estimated C$35 in financing costs (which is the after-tax income on cash cost of the deal, likely to impact the corporate segment).

• The deal is expected to close in Q2/07.
Bloomberg, Sean B. Pasternak, 11 January 2007

Sun Life Financial Inc., Canada's second-largest insurer, agreed to buy the U.S. group benefits arm of Genworth Financial Inc. for $650 million to add small business and dental insurance accounts.

The cash transaction is expected to close in the second quarter and will increase earnings by 5 cents a share in 2008, Chief Executive Officer Donald Stewart said today.

Sun Life will become the fifth-largest provider of group life insurance in North America, the company said. The Toronto- based company will save about C$20 million a year in expenses ($17 million) according to Chief Financial Officer Richard McKenney, while expanding distribution for the smallest of its U.S. insurance lines.

"There's very substantial business-line overlap," Stewart said today in a telephone interview.

Genworth, an insurer formerly owned by General Electric Co., plans to focus on other products such as mortgage insurance and long-term care policies, said company spokesman Thomas Topinka. Group benefits plans are insurance policies sold to workers through their employers.

The sale should produce a "modest gain," Genworth said, and proceeds will be used to expand other businesses, possibly through acquisitions. The money also may be used for share buybacks or dividend payments, the company said.

McKenney, who joined Sun Life last year, previously spent a decade working at Richmond, Virginia-based Genworth and thus "will be very familiar with the assets," UBS Canada analyst Jason Bilodeau wrote today in a note to investors.