Sunday, July 12, 2009

(No.39) Sun Life & Manulife: dull perhaps but not dumb

It has not been particularly difficult, as the revelations arising from the financial services meltdown have illustrated, for a financial institution to create an aura of great success -- including one whose performance invites but does not receive careful and informed external attention. When it came to life insurance companies the so-called experts to be found among the ranks of securities firms, rating agencies and financial journalism (the 'paparazzi' of the financial services world as I think of them) too often asked questions that amounted to little more than filigree work on nothing.

I came to wish to hear more than an occasional questioner on the quarterly conference calls held by the senior managements of big companies like Manulife and Sun Life go beyond the predictable or peripheral. For years I marvelled at the adulatory coverage of Manulife and its CEO Dominic D'Alessandro, treatment sometimes closer to cheerleading than analysis. 

Then post-market meltdown, when Manulife hit a wall of sorts with its multi-billions of dollars of unhedged risk (future liability) from the guaranteed 'variable' policies it had received rave notices for selling by the truckload, one saw no cogent explanation of how this situation had come along so far with little or no real public caution or even remark. While it involves a different country, context and scale the parallel is striking with the absence of public comment pre-Wall Street meltdown on the danger of the so-called "financial products business" (credit default swaps) undertaken by AIG -- an insurance enterprise now indebted to the US taxpayer for $180 billion of bailout support. 

In terms of Sun Life the commentary over time by most of the same group treated this large and conservatively managed company, one that had not ceased hedging the type of risks Manulife had (beginning in 2004), was briefer and less interested. Partly, it must be said, this was because its CEO then and now, Donald Stewart, did not attract the same sort of comment and reaction as did Mr. D'Alessandro whose quotes seemed to be forever golden with a certain type of audience. Flamboyance in these matters seems to have been a trump card to play when dealing with the financial services 'paparazzi'. 

Mr. Stewart, the head of Sun Life's world-wide operations, is a gentleman of considerable intelligence, insurance industry experience and modesty. He is not at ease with the media nor is he one to toss off colourful quotes. He could not compete with his Manulife counterpart in any game of self-aggrandizing publicity -- nor do I think it would ever occur to him to try. He is a man about whom there is much to respect but not one who will ever shine as a diamond set in the balance wheel of any corporate publicity machine. 

Sun Life has tended to be treated as the archetype of a 'dull as dishwater' life insurance company. The talking heads of the 'paparazzi' now seem to have turned their focus to speculating about why and to what extent Donald Guloien, Manulife's new CEO, seems to be so intent on improving very substantially Manulife's financial strength. 

Now there's a real puzzler alright. It is as if they do not really understand the nature and potential magnitude of the unhedged risk posed by the liability Manulife has on its books on account of the billions upon billions of dollars in variable business the future value of which it guaranteed for purchasing policyholders -- and the financial implications of what it faces if the stock market goes pear-shaped again. Add to that uncertainty the investigation launched in June by the Ontario Securities Commission into Manulife's previous level of disclosure on the risks posed by the writing of this sort of policy. 

What the talking heads might spare a moment or three to contemplate today is why the market-place, influenced if not guided by their often uninspired analysis of both these large Canadian life insurance companies, seems currently unwilling to widen more significantly the existing gap in share value (although already in Sun's favour)  between these two competitors. That is -- to recognize the advantages that Sun's operations, assets and overall financial solidity, guided by the careful and experienced hand of Mr. Stewart, offer to investors and why a very solid, conservatively managed company like Sun Life deserves more attention and credit based at least partly on the demonstrated foresight of its management. 

In the interests of disclosure: I do know something about Sun Life and the life insurance industry. Until the end of 2008 I was a Sun Life employee, my former employer (Mutual Life/Clarica) having been taken over by Sun. I was critical of aspects of Sun Life's operation while I was an officer of the company and have offered comment critical of Sun since I left the company (see, for example, columns Nos.9 & 26 posted in RickardsRead.com). 

In the editor's columns of The Canadian Journal of Life Insurance, starting in 1978, I offered opinions critical of the life insurance industry and of both Sun and Manu. For example, early in CJLI's existence I criticized Sun Life for both its wrong-headed decision to move its head office from Montreal to Toronto and the decision-making and ratification process it used to bring this about. 

As for Manu I gave one of its CEOs an award I had created and occasionally handed out in recognition of an absence of excellence relating to the Canadian life insurance business. I had named the award after Canada's least distinguished prime minister (1894-96) Sir Mackenzie Bowell, an Orangeman from Belleville, Ontario.

These are among the life insurance industry bona fides in which -- together with occasional threats of legal action against me because of my publicly expressed views -- I still take some pride and satisfaction all these years later. 

I do not now hesitate to suggest that it is time for today's self-described experts on the Canadian life insurance business to recognize that what the new Manulife CEO is trying to do (a matter apparently of great speculative interest to them) is to move Manulife to the sort of solid public position from which its longtime rival Sun Life never departed.

It is time that the hangers-on of the financial services business, the expert 'insiders' began to assimilate enough about the core realities of the life insurance business to recognize consistently the difference between flash and facts. Had this been the case pre-meltdown in the US perhaps we might, before the scandal reached its horrendous climax, have had more than a corporal's guard among the 'paparazzi' pointing out publicly to investors and government alike which members of the emperor's financial services court were without clothes.

Alastair Rickard

email: Alastair.Rickard@sympatico,ca