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Great-West Life sells US unit for $ 1.6 billion

Great West Lifeco headquarters in Winnipeg.


Great-West Lifeco Inc. Sells US $ 1.6 Billion Life Insurance & Annuity Business, Slightly Growth But Stable

Canadian life insurance company announced Thursday that its Colorado-based subsidiary Great-West Life & Annuity Insurance Company (GWL & A) has struck a hit Protective Life Insurance Company, the primary subsidiary of Protective Life Corporation, is discharging its individual life insurance and annuity business. The deal is subject to regulatory approval.

The proposed divestiture was following a portfolio review begun at the end of 201

7, CEO Paul Mahon said in an interview with The Globe and Mail. The review coincided with a broad shift across the industry, with some insurers placing less emphasis on their traditional life lines due to high capital requirements and lack of interest from millennium customers.

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"We wanted to make sure we had the right growth profile and the right balance between financially weak and capital-rich businesses," Mahon said of the sale. South of the border, Great-West will now focus on asset management through its Putnam subsidiary and Empower's pension products.

The companies sold include the life insurance of banks and companies, which includes a single premium life insurance policies, individual pensions and a closed block of life insurance and pensions – or those that are no longer actively sold to customers. In recent investor presentations, these businesses have been largely glossed over by Great-West Life executives in favor of Putnam and Empower.

The sale frees Great-West at a crucial moment to invest elsewhere. Interest rates have risen, but stock prices for life insurers have largely not benefited – even though they are now generating higher returns on the premiums they have accumulated and invested. Across the industry, Canadian life insurers traded at a weighted average price-earnings ratio of 8.7, the lowest level since the global financial crisis and a 15 percent discount on Big Six bank trading. According to the National Bank's financial analyst, Gabriel Dechaine.

Now the question arises where Great-West will use the new funds. The company has long talked about executing a US asset management acquisition to further expand its struggling Putnam Investments arm. The deal would allow the company to divide the costs into more assets, which could result in Great-West cutting fees.

However, there has been some skepticism among analysts about the benefits lately. "While an acquisition could help make Putnam a truly profitable company, evidence of M & A as the driver of outperformance does not support it," Dechaine wrote in a note to customers.

Dechaine points to two recent acquisitions that led to disappointing stock performance following the announcement of the deal: the 2018 deal in which Invesco ltd. OppenheimerFunds Inc bought; and the 2017 deal, where Janus Capital merged with Henderson Global Investors.

The sale in the US will generate $ 1.6 billion in cash, consisting of a $ 1.1 billion commission and a $ 530 million release. However, the company is sold at a loss of $ 93 million and includes transaction costs of $ 76 million.

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Cash will be released to close in the first half of 2019. This eliminates a stable business that consistently contributed around 5 percent of the company's annual results. The companies sold contributed approximately $ 120 million to their net income in the first three quarters of 2018.

Investors sent Great-West shares down 4.8% on Thursday. Some analysts are skeptical that the insurer will be able to use the money in a company that more than compensates for the lost revenue.

However, share buybacks are another option – something that the company is considering. In November, competitor Manulife Financial Corp. sold also the liabilities from the USA by reinsurance and thus freed a billion US dollars. Manulife then announced a dividend increase of 14 percent and a repurchase of up to 40 million common shares.

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