Saturday, May 9, 2009

(No.26) Sun Life: downplaying Canada

Sun Life Financial's 1st quarter 2009 results both illustrated and reinforced a number of the opinions I expressed in a lengthy post to RickardsRead this past January:"(No.9) Sun Life: shrinking to greatness?".

In summary:
  • a net operating loss of $186 million (Can$) with the losses generated by 2 of the 5 business units: the U.S. $407 m and Corporate (which includes the UK and reinsurance) $45m.
  • of the 3 Sun units on the plus side, Canada accounted for $194 million out of a total of $239 million.
  • while these Sun Q1 results show a net operating loss for Sun for the quarter it is worth emphasizing that this result was still very favourable in comparison with its leading Canadian competitor -- Manulife. In fact it was less than 1/5 of Manulife's 1st qtr 09 loss and its 4th qtr 08 loss (both $1 billion+); in this connection q.v. Manu's unhedged (beginning 2004) equity-related but guaranteed billions of asset product sales: amount guaranteed end of 2007 of $69 billion rising to $103.8 billion at the end of Q1 2009.                                                             
These Sun Life results occurred against a background of a 4% staff cut to begin 2009 in its Canadian operation as well as layoffs elsewhere, the Canadian operation often accounting for half or more of the engine of profit offsetting unimpressive results elsewhere in Sun's worldwide operations. Further budget cuts for 2009 in the Canadian operation continued to undermine the needed level of support for distribution of individual products in Canada.

The competitive backbone  of Sun's individual product distribution in Canada is the career agency system Sun obtained as part of its purchase of demutualized Mutual/Clarica Life. It supplanted most of what was left of Sun's own agency distribution in this country, a system which at the time of the purchase had declining individual life sales and a declining Canadian market share and was, in reality, based on sales of policies of inadequate or non-existent profitability. 

Company support for the Mutual/Clarica/Sun career agency system has been squeezed and increasingly inadequate since the decision by Mutual Life senior management to demutualize. Sun has for years reduced the resources needed to enhance and expand the career system it purchased while it pursued a goal (never larger in Sun eyes than today) of eliminating a supposed "revenue-expense gap", one defined by its finance dept. bean counters and based on dubious numbers and questionable assumptions.

As a former Sun Life executive myself I observe that all of this was (and is) enough to prompt either tears or laughter especially as one considers the refusal of Sun senior management to invest an appropriate amount in supporting and improving its Canadian career agency system, one for which it paid so much and on which its Canadian operation ( Sun's golden goose) depends to such a significant extent for its results.  

Meanwhile Sun's corporate management, not quite yet aping drunken sailors, throw money at its nascent agency distribution in its various Asian operations, agency systems most of which even on a good day bear more resemblance in their quality to, say, the London Life debit system of 1950 than to Sun's own Canadian career agency system today.  For the 1st qtr of 2009 Sun's Asian operations, and they are extensive, generated a supremely unimpressive $17 million of net operating income.

Even more discouraging for those interested in Sun retaining a reasonably healthy career agency distribution system in Canada is knowing what even a small fraction of the hundreds of millions of dollars flushed by Sun in the US in the past 12+ months as the result of poor investment decisions could have accomplished if applied to Sun's agency distribution in Canada.

Based on what I understand about Sun's individual insurance sales in Canada so far this year it will be fortunate to end 2009 having achieved 90% of its plan. One thing is certain: the sales gap will not be closed and real individual insurance sales potential will not be achieved by the diversion of already excessively limited distribution system budget dollars to (as is the case this year in Sun's Canadian operation) the determined but fantasy-driven initiatives of senior executives involving 'direct' sale/distribution of individual life insurance.

The time is long past due for Sun to stop downplaying the importance, indeed the continuing centrality to Sun profitability of its Canadian operation and invest in it accordingly. Nick Clegg, leader of Britain's Liberal Democratic Party, said to beleaguered Prime Minister Gordon Brown in the House of Commons on May 6: "There comes a point when stubbornness is not leadership; it is stupidity."  

As a Sun Life shareholder I hope that this Commons comment will not come to be relevant to a seeming determination by Sun Life's senior corporate management to continue to downplay the importance of the company's Canadian operation while skimping on investment in its operational effectiveness in favour (for example) of excessive focus on the pursuit of financial 'pie in the sky by and by' in Asia.

Alastair Rickard