Saturday, January 24, 2009

(No.9) Sun Life: shrinking to greatness?

Those who follow RickardsRead know I was until recently an employee of Sun Life as well as having been a critic of the company going back years to my time as editor of The Canadian Journal of Life Insurance.

Sun Life was and is a very solid company whose worth and prospects have been consistently under-appreciated by 'market analysts' who frequently have only a superficial understanding of the reality of the life insurance business, especially its core business:  'selling stuff' and how this is done profitably through effective distribution. 

More than is the case with the big Canadian banks there has been a tendency for analysts and financial media to under-estimate the value and advantage to a company like Sun Life of having its Canadian operations as the profitable foundation on which rests its world-wide operations -- providing 46% (2007) of total net income, a % likely to be still higher at Sun for 2008. This under-estimation is entirely understandable since Sun's senior management goes out of its way to downplay the importance of what its strategy treats as the 'small' Canadian market (although still the most important source of Sun profits) in order to play up the prospects for great future profit it sees from its operations in Asia. 

Speaking as one who has been closer for the past several years to Sun's actual operations in Canada than many of those I have seen commenting on them publicly:  I have long regarded the Sun share price for most of that period -- a high of $51.25 during the past year but mostly much lower, in the range of its current $23-$25 -- as ridiculously low for a company of Sun's size, impressive financial strength, comparative competitive advantages, diversity of markets and performance generally over time. 

It is worth noting that a number of Sun's top officers and directors apparently feel the same way: in 2008 Sun insider share holdings increased by 20%. I have acted upon my opinion of Sun Life value and prospects as being far above current share price by purchasing more Sun shares for myself recently. However that is not to say I do not have reservations involving aspects of Sun's operations, especially actions announced in recent days. In fact I do.

Last week Sun announced a reduction of 4% in its staff world-wide and there will be 2009 operating budget reductions, at least in Canada. I suspect the reductions may well come disproportionately from Sun's operations in Canada, an unwise step given the role of those operations in generating the lion's share of the company's total profits. The Canadian operation has already in recent years been the subject of excessive budget pressures and reductions, particularly affecting the support for individual product career agency distribution.

If all the employees in Sun's operations world-wide (including MFS in the US and Birla in India) total at least 22,000, then 4% of staff would be approximately 900. But what sense does it make to have the Sun employees in Canada (approx. 7300) have to account for roughly a third (or even more?) of that total when the Canadian operation is also the workhorse whose efforts continue to carry along a disproportionate share of Sun 'passengers' located outside Canada? I will remain unconvinced that the burden of the reductions in Sun's staff (and budgets) reflect an appropriate distribution of the total until Sun is prepared to release detailed divisional/country by country information including where exactly the 4% staff reductions actually take place.

I have listened to a steady increase in recent years in industry rhetoric lauding the importance of a company's people -- staff and agents and brokers. Warm and fuzzy PR/HR style 'messaging' is the order of the day. Sun is no more prominent in making use of this approach than other life companies. Simultaneously I have observed a decline in the loyalty of too many companies to these same people as manifested in company actions as distinct from words. One knows of course that talk is easy -- and cheap if not backed up. Employee and agent loyalty to a company must be (and should be)  earned -- and sustained.  

Based on what I have already heard from within the Sun Life community after the company escorted so many people out the door last week, this action decreased still further morale among Sun's Canadian employees who remain. This will be even more the reality since the management communications to employees about the need for staff and expense reduction now shared nothing of real substance with those directly affected about specific causes, for example about the role of company losses in 2008 on its US investments as a major reason.

The inevitable further decline in the Canadian operation's employee morale and loyalty is unlikely to be offset by the recent declarations from senior management about how "unfortunate" the "job reductions" in the Canadian operations are although "necessary to reduce our size in order to manage through this recession". No mention about the role, as causes, of the losses in and costs of Sun's operations outside Canada.  

Squeezing its human capital may seem a predictable response for any stock company that is failing to meet -- or is afraid it will fail to meet --  investment analysts' often uninformed and unrealistic short-term financial expectations for a company. But managing with a view to this audience and a company's 'rating' can and certainly has sacrificed much longer term benefit in the often unsuccessful pursuit of more favourable short term numbers. It seems to me to be poor strategy indeed measured by its negative effect into the future on remaining staff.

The downward pressure on provision of adequate ongoing financial support to the Mutual/Clarica/Sun Life career agency distribution system in Canada (the biggest and best such system in Canada) actually got well and truly underway long before the Sun takeover of Mutual Life. It can be dated from the point at which Mutual Life's demutualization appeared on the horizon of Mutual Life's senior management. 

Whatever 'fat' may have existed in the support and operation of that career distribution system has long since disappeared yet the reduction in the level of support necessary for the future health and enhancement of that system has continued up to and including today. The idea that year after year a quality career agency distribution system can be expected to produce more and more sales based on less and less of the sort of resources needed to do so does not spring from intelligent decision-making. It is at best the product of wishful thinking and distribution strategy trickling down from financial bean counters who see the sales world from the wrong end of the telescope. At worst it is foolishness married to fantasy --  all the more so if that career system is a cornerstone of a company's most important profit generator as is the case in Sun Life. 

One longtime member of the Mutual/Clarica/Sun Life agency system in Canada said to me recently: " It looks to me like Sun's actions are taking its agency distribution in Canada back to where it was before Sun was able to buy the Clarica career system, back to declining life sales and declining market share." His prediction may turn out to have traction unless there are changes. 

I would add that one of the major reasons for the challenge to the productivity of the Sun career system as a producer of insurance sales is Sun's emphasis and incentive on having the agents sell more and more asset products, especially CI mutual funds. Sun management either cannot or will not see that there is a connection: i.e., asset sales are the easier sales and when these asset sales are the focus of company direction via heavy promotion with the sales force (particularly when a lifetime level commission system for insurance enables it, as the Sun career system's does) it encourages established agents to spend more and more of their time going after the easier asset sales at the expense of the harder sales (insurance).  

As I have watched and experienced Canadian mutual life insurance companies demutualize and become governed by the 'shareholder value' mantra I have observed that one of the things their stories appear to share is insufficient regard for the longer term consequences of being unwilling to forgo, say, making a dime a share this quarterly dividend in order (for example) to enhance and expand Canadian agency distribution in one or more of its various forms, and do so with even a fraction of the investment enthusiasm directed to prospectively profitable operations in distant markets. 

One understands the need for Sun Life to be seen by 'the market' to take action to offset the loss of hundreds of millions of dollars in the recent US market meltdown (large in absolute terms but no threat to Sun's financial solidity). But risking hobbling its most profitable operations, i.e., those in Canada, seems both misguided and short-sighted. Sun Life is unlikely to shrink to greatness, particularly if that shrinkage occurs disproportionately in its Canadian operations while it waits, say,  15 years for its newer Asian operations (e.g., China) -- in which, unlike Canadian career agency distribution, it enthusiastically continues to 'invest' -- to achieve a 15% ROE.

I don't doubt that Sun Life has job roles that could be cut without affecting operational effectiveness and productivity (indeed I too often saw such roles created and filled within Sun) but reducing the food fed to Sun's Canadian goose, the one that continues to lay so many of the operational golden eggs the company gathers each year, is questionable. 

I well recall being dismayed following the Sun takeover of Mutual/Clarica (where there had been an ongoing effort to eliminate unnecessary layers of management as well as administrative processes) to see a Sun culture -- one which still featured the sort of bureaucracy and red tape I had commented upon editorially all those years ago -- reverse this direction while in my view simultaneously prioritizing the reduction of supposed 'revenue-expense gaps', gaps involving some dubious assumptions, suspect numbers in terms of the real world of agency distribution and insufficient attention to insurance sales marketplace realities. 

To the extent that Sun in Canada must contribute to the company's recent world-wide food  rationing then the focus should properly fall on Sun's 'corporate' (non-operations) establishment in Toronto, the 'mothership' whose upkeep constitutes no small cost, and a sector of the company so expansive that it could surely benefit from the business equivalent of a visit to Herbal Magic or Jenny Craig. 

As for the many valuable people at Sun who were shown the door last week, it will not be even the smallest comfort for them to know that they are joining a very long line that began forming several years ago behind a banner carrying the words "SORRY BUT ...." after the Sun takeover of Mutual/Clarica.