Tuesday, August 18, 2009

(No.46) Manulife, Sun Life & shop-worn insights

Because I was the founding editor of the Canadian Journal of Life Insurance and am a former executive of the Mutual Life of Canada (demutualized, renamed Clarica Life and then taken over by Sun Life) it is perhaps unsurprising that I have devoted a fair number of the nearly 50 columns written so far this year for RickardsRead.com to the financial services business, especially its management defects.

I have also written specifically about Sun Life and  Manulife (see RickardsRead.com Nos. 9, 26 & 39) as well as the financial services 'paparazzi' in Canada, the self-styled experts of the rating agencies, securities firms and financial journalism. They are members of the same fraternity as their brethren on Wall Street who, in the years and months leading up to the near collapse of the U.S. financial system, were largely useless even as canaries in the financial coal mine. 

In the public arena the attention of the Canadian paparazzi (as between Sun and Manulife) has favoured Manulife over the years to a ridiculous extent. This may be due in no small measure to the performances for the paparazzi of (former) Manulife CEO Dominic D'Alessandro. 

Meanwhile, so besotted were the paparazzi with the great quotes and the energetic self-promotion from Manulife, they managed (at least insofar as providing useful warnings to the investing public) to ignore or remain oblivious to the implications of the fact that Manulife had ceased in 2004 to hedge the tens of billions of dollars of risk guarantees associated with the variable annuity business it was selling -- but Sun Life had not stopped hedging. Indeed it was not until recently that Manulife's rating was even reduced -- from triple A to double A+.

Not that many people in the business weren't aware of the real story as well as the imbalance in attention. As one senior insurance executive wrote to me recently: "Gotta love the spill from the necessary shoring up of Manu's reserves due to years of variable annuity sales without hedges. As you would expect Manu is continuing to get positive press for making the tough decisions (about a decade too late) and all others like Sun are assumed to not be as insightful and forward thinking."

On Aug.6, 2009 both Manulife and Sun presented the market-place with their 2nd quarter results and as part of this process the most senior members of company managements made themselves available to the usual suspects from the financial services paparazzi. I have seen no better example of the continuing and disproportionate attention paid to these two leading Canadian life insurance companies than can be found in the Aug.7 issue of the Globe and Mail's Report on Business section:   3 major pieces devoted to Manulife beginning on the first page of the ROB and occupying all of p.B10.

Column inches devoted to Sun Life's results in the same Aug.7 issue of the Globe's ROB?  Zero.

Doubtless the defence offered of this ridiculously unbalanced coverage would involve the fact that Manulife announced a cut of its quarterly dividend by half in order to retain $800 million of capital a year. Doubtless worth some space but hardly so much as to justify the exclusion of even a cursory review of Sun's performance. 

The post-Aug 6 'expert' analysis of the Manulife move was hardly all that impressive given new CEO Donald Guloien's previously declared intention to prepare the company financially for a future that will likely involve still more very choppy financial waters. Dividend reduction -- how big a surpise given the company's exposure to guaranteed investment/stock market risk and in light of the fact that the CEO had already taken Manulife to market last December to issue more common shares as a way of gathering in more capital (more than $2 billion)?

I recognize that for the financial services paparazzi the chewing of the Manuife cud seems to have become over time an irresistible activity. It reminds me of nothing quite so much as CNN's 'talking head' panels drawn from their roster of familiar 'experts'  who repeat shop-worn comments on American politics and do so in sound bites short enough not to strain the supposed attention span of CNN viewers. The thoughtful American viewer of public affairs is left to seek out lengthier, more informative insights on PBS.

Meanwhile, informed analysis of both Sun Life and its second quarter results is thin on the ground, almost as hard to discover in Canada as intelligent comment from U.S. Congressional Republicans in the current American debate over health care reform  (q.v., RickardsRead.com, Nos. 44 & 45).

I shall return to this subject and to Sun Life, probably in my next column (No. 47).

Alastair Rickard


email: Alastair.Rickard@sympatico.ca