Canada's Great-West Lifeco buys Prudential's retirement business for $3.5 billion

By Nichola Saminather and Sohini Podder

(Reuters) -Great-West Lifeco Inc (Lifeco) said on Wednesday its U.S. unit would buy Prudential Financial Inc's full-service retirement business for about C$4.45 billion ($3.51 billion), in one of the Canadian insurer's biggest deals yet as it accelerates its expansion.

The acquisition by Empower Retirement, the second-largest retirement plan provider in the United States, will expand the subsidiary's contribution to earnings to 30% by the end of 2023, from 10% in 2020, and add about $325 million in after-tax earnings by the end of 2023, Lifeco said in a statement.

While the deal would boost Lifeco's presence in the world's biggest retirement market, DBRS Morningstar analysts said the resulting "significantly higher" debt levels than peers would negatively impact its financial flexibility. They also expressed concern about integration risks after recent large acquisitions.

Lifeco shares were up 1.5% to C$37.12 in early afternoon trading in Toronto, compared with a 0.6% gain in the Toronto stock benchmark. Prudential shares added 2.8% to $101.81, versus a 0.6% increase in the S&P 500 <.SPX> index.

The deal underscores continued interest among Canadian insurers in expanding overseas amid rising premiums and high levels of capital. Overseas acquisitions by Canadian insurers reached a 20-year high last year, according to Refinitiv data.

Lifeco has spent billions of dollars on a raft of U.S. acquisitions in recent years, including the retirement plan business of MassMutual, which closed in January, and financial technology company Personal Capital, which it completed in 2020.

The United States "is the largest retirement market in the world. We see significant opportunity for growth there," Lifeco Chief Executive Paul Mahon said in an interview. "We were relatively underweighted in the U.S. and like the diversification across markets."

The deal will expand Empower's customer base to more than 16.6 million, from over 12 million in 2020, and boost assets under administration to $1.4 trillion, from $1 trillion in January, according to the company.

The acquisition provides "strong economies of scale and a key growth platform for Empower," DBRS Morningstar said in a statement maintaining Lifeco's rating at A, adding that an upgrade is unlikely in the medium-term given the increase in financial leverage and integration risk following its recent acquisitions.

The purchase, which is expected to close in the first quarter of 2022, will be financed with a combination of debt and existing resources, it said.

Lifeco does not disclose the dollar value of its excess capital, which has funded the bulk of its recent deals, but it remains above the top end of its internal requirements in both Canada and the United States, Mahon said.

"We will always keep a watching brief on other markets and opportunities ... but our primary focus will be on markets we're operating in today" in the United States, Canada and Europe, Mahon said.

($1 = 1.2682 Canadian dollars)

(Reporting by Nichola Saminather and Sohini Podder; Editing by Bernadette Baum, Elaine Hardcastle and Paul Simao)