EUR 850.00 For Business Accounts Only

Morningstar | Great-West Sells U.S. Life and Annuity Operations to Protective

We’re maintaining our CAD 36 fair value estimate for Great-West Lifeco after Great-West announced the sale, via reinsurance, of nearly all of its U.S. individual life and annuity operations to Protective Life for CAD 1.6 billion, with the deal likely to close in the first half of the year. This sale is expected to free up capital of approximately CAD 530 million and will be incorporated into our model by higher levels of ceded premiums upon transaction closure. Annual net income is expected to decrease by about CAD 120 million, less than 5% of our forecast 2018 net income. With the sale, U.S. subsidiary Great-West Life & Annuity Insurance Company will maintain the Empower retirement and Putnam asset management brands, and will refocus its efforts in the U.S. market on these operations. We generally view this refocusing as a positive, while maintaining our concerns with the continued unprofitability of Putnam.

We believe the market may not be fully digesting the improved geographic specialization resulting from the sale and is underestimating the ability of management to effectively deploy capital. We consider stewardship at Great-West to be exemplary and management has a history of positive strategic moves, including the acquisition of Irish Life and later entry into the variable annuity business. Greater focus on the U.S. retirement market and more flexibility on capital allocation are positive developments, in our view, and we believe management has put the company in a better position by choosing to exit the more commoditized U.S. life insurance and annuity markets.

We view the life insurance industry as one in which it is challenging to build a moat. This is due to underwriting commoditization and because pricing errors only become apparent in the longer term. As such, we believe the sale of Great-West’s U.S. life insurance business provides potential for Great-West to improve its U.S. operations, especially if Empower Retirement can maintain a strong market position. Empower is the second-largest plan record-keeper by number of participants and administers over $530 billion in assets. Additional capital investment resulting from the sale of the life insurance business will enable Empower to continue to capitalize on the growth in demand for retirement plan services. In contrast, while wealth and asset management operations are potentially moaty, Putnam has struggled to gain momentum since being purchased by Great-West in 2007. We continue to believe Great-West should consider divesting Putnam to prevent further shareholder value erosion.