Friday, September 24, 2010

(No.115) Somewhere Towards The End

Since beginning I have from time to time recommended books and authors whose work I have found rewarding. I do so because I assume that many readers of these columns are likely to share my enjoyment of good writing, fiction and non-fiction.

I very much enjoyed several volumes of memoirs by a fascinating Englishwoman, Diana Athill, who is now 93. An Oxford University graduate, raised in a problematic upper middle class home, she worked as a literary editor and herself wrote both novels and memoirs, retiring from her career in 1993 at the age of 75.

She spent 50 years in London publishing including helping Andre Deutsch build his British publishing house. She never married but had affairs, several long term relationships but no children.

Of several volumes of memoirs her first, published in 1962, Instead Of A Letter [Norton], is like all her non-fiction: still in print and available in softcover. It is about her youth and young adulthood including a broken engagement with a member of the RAF who later died during World War II.

It was for her one of a series of formative events and years later, writing this volume ca 1960, she said prophetically that "I see my story, ... sad though much of it was, as a success story. I am rising forty-three, and I am happier in the present and more interested by the future than I have ever been since I was a girl .... But is it a story which will seem worth having lived through, of value in itself, when I come to die?"

Doubtless Athill at age forty-three would never have predicted that she would still be alive and writing in her nineties -- but she is, and the reader is the more fortunate because of it.

During her career in publishing Athill worked with many well-know authors about whom she has interesting insights, including Philp Roth, Mordecai Richler, Simone de Beauvoir, Jean Rhys and V.S. Naipaul. Her 2000 memoir, Stet: An Editor's Life [Grove] is a refreshing look at the reality of literary publishing in post-war Britain. But she is not one one to look to the past as a literary golden age.

"It is, of course, true that reading is going the same way as eating," she wrote,"the greatest demand being for the simple, instantly recognizable flavours such as sugar and vinegar or their mental equivalents: but that is not the terminal tragedy it sometimes seems to the disgruntled old. It is not, after all, a new development: quick and easy has always been what the majority wants."

The Athill book which had the most impact on me (as I suspect it might on anyone who thinks about the end of life, including their own) is her prize-winning Somewhere Towards The End [Granta] written mostly when she was 90 and published in 2008. In all her books she writes not just well but with a pleasing clarity. Her use of the English language is so pleasing that one stops and rereads paragraphs to savour both a thought and its expression.

In this, her last book, she looks back with a complete absence of sentimentality and no hint of an aged curmudgeon. "It seems to me," she writes,"that anyone looking back over eighty-nine years ought to see a landscape pockmarked with regrets. ... Regrets? I say to myself. What regrets? This invisibility may be partly the result of a preponderance of common sense over imagination: regrets are useless, so forget them."

Athill offers views which will resonate with many readers and for different reasons. For example, with those who devoted their working lives to the service and interests of one or two employers and did so loyally, only to be tossed aside by the employer because of this merger or that corporate expense reduction. "Loyalty unearned," she concludes, "is simply the husk of a notion developed to benefit the bosses in a feudal system." Amen.

If only the average 50 year old CEO could think half as clearly and express himself or herself half as well as this 93 year old Englishwoman.

Somewhere Towards The End is an extraordinary book by an amazing woman who has lived a thoughtful and interesting life -- and has thought about that life in a serious way and shared those thoughts over several volumes.

It is both timely and welcome that Athill has written this volume now when popular culture still too often portrays people who reach age 80, much less 90 as little more than child-like, if not gaga. Her book thus provides the reader with a welcome antidote to the toxicity of pop culture. Just as, in the realm of Canadian politics, 89 year old Hazel McCallion does as mayor of Mississauga, one of Canada's largest cities.

Diana Athill has written an impressively thoughtful volume about approaching the end of life, the most affecting I have read on the subject. She has lived a long and worthwhile life that began during the First World War, reaching her old age with mental acuity intact in the second decade of the 21st century.

Nearing the end of her life she concludes that "digging out past guilts is [not] a useful occupation for the very old, given that one can do so very little about them. I have reached a stage at which one hopes to be forgiven for concentrating on how to get through the present."


In 2009 a 670 page volume of memoirs selected from four of her books was published by Granta: Life Class:The Selected Memoirs of Diana Athill.


Alastair Rickard


Tuesday, September 21, 2010

(No.114) Canadian banks: mistakes & excessive praise

Earlier this month I spoke to a conference of life insurance brokers at the Crowbush Resort on Prince Edward Island. The meeting was organized by the MGA firm Younker and Kelly. What follows is taken from that presentation.


In the wake of the financial services meltdown in the U.S. and Europe I have read and heard much praise heaped upon Canadian banks for their admirable strength and stability during the international financial crisis. The credit actually belongs mostly to strong Canadian federal banking rules (about which Canadian bank executives have periodically pissed and moaned) and even more important, to strong federal regulators who enforced the rules whether the banks liked it or not. Both of these key regulatory elements were deficient in the U.S. and Europe.

Those were the factors that had most to do with preventing Canadian banks from following some of the worst of what their American and British peers were doing in their pursuit of the financially ridiculous. Nor is it true that the Canadian banks received no crisis-related financial backing from Ottawa unless one excludes a $200 billion low interest line of credit.

In any case it is interesting that the big Canadian banks, despite their supposed superior management, in the three years 2007 through 2009 wrote off an estimated $21.5 billion they would otherwise have recorded as profit because of their exposure to bad bets they made largely on U.S. 'investments' that went down the porcelain convenience. [For other comments on this subject in, see column No.90: "Banks, stability & insurance: the silly & the wise".]

Still, not to worry; the huge profits the banks make quarterly from the Canadian retail banking customer serve as far more than an adequate offset for these and other losses in their non-Canadian adventures. It reminds me of the profits Sun Life derives from -- as its corporate perspective would have it -- its 'small population market' Canadian operation (compared with Sun Life in China, India, Indonesia and the U.S.). Funny thing though, these Canadian dollars serve as a predictably reliable financial foundation supporting the company in the absence of sufficient profits from its international operations.

In terms of government expansion of the big Canadian banks' still limited ability to retail insurance (life as well as property insurance) in their branches I do not look for any change, at the very earliest, before the election of a majority federal government, and probably not then. Keeping the status quo is a political reality that has been reconfirmed by federal finance Minister Jim Flaherty, in major part because no federal government (including his) wants another political fight with insurance agents, and all the more so if it is a minority government.

If it is also a government, like Prime Minister Harper's Tories, whose core political support is in areas of the country like the prairies where historically dislike for the big eastern banks is almost bred in the bone, it will not be seeking ways to accommodate the Bay Street banks' insurance wish list no matter how fervent their desire for change.

Even if the feds decided to change the rules for bank branch retailing of insurance (something they could do tomorrow by regulation rather than statute) it would still be a matter for each province to decide on what basis they would permit expansion of bank insurance retailing. Remember: which individuals can sell insurance, where and how has been confirmed by the Supreme Court of Canada to be a matter of provincial jurisdiction.

I confess that for more than two decades I longed both privately and publicly for the big banks to make the mistake to which I believed their unique combination of size, arrogance and ignorance might eventually lead them: to challenge in court provincial jurisdiction over insurance distribution as it involved federally chartered and regulated banks and how banks could and could not go about selling insurance.

I published (in a series of articles by the late life insurance company general counsel Benson Rogers in my Canadian Journal of Life Insurance) the definitive treatment, then and now, of the legal and regulatory history of the Canadian federal/provincial constitutional divide in insurance. I was confident that the bankers would lose, blinded as they were by their Pavlovian view that whatever banks do (including selling insurance) is banking and therefore excluded from provincial regulation even when it involved agency insurance distribution. And they did lose -- big time, to quote former U.S. Vice-President Dick Cheney.

The mistake I had long awaited was made by the banks in challenging Alberta insurance legislation. The banks lost their challenge in Alberta court, lost again on appeal and then compounded their mistake (God bless their arrogance and high-priced legal advice) by appealing the Alberta case [Western Bank v. Alberta] to the Supreme Court of Canada --- where in a May 2007 SCC precedent-setting decision they lost on all important counts, as I had predicted they would.

As for what the big banks can hope for in terms of provincial regulation, provincial governments have shown little affection for them and their persistent efforts to get their own way, not least because lobbying by p&c and life insurance agents can be even more politically potent at the provincial level than it has been in Ottawa. In fact at both the federal and provincial levels the p & c side of the insurance business has become the strongest element in the political fight over expansion of bank branch retailing of insurance.

When I think of the big Canadian banks' indefatigable commitment to getting ever larger as well as their dependence on the Canadian retail banking customer to bankroll their extra-Canadian financial adventures, I recall a comment made by K.R. MacGregor, Canada's federal Superintendent of Insurance and later CEO of the Mutual Life Assurance Company of Canada which he said "is not seeking growth merely for the sake of growing, but rather growth in order to serve better and more completely. The dinosaur's lesson is that if some bigness is good, an overabundance of bigness is not necessarily better."

While that seems today both wise and prescient it also sounds quaintly old-fashioned in an era when the pursuit of inflated executive compensation ensures that ramping up short term corporate profit through questionable activity (leveraged and otherwise) is too often the guiding light for senior management. Consider what has happened since 2007 in North American financial services and the economy (indeed the western world's) and one appreciates not only the foresight of Mr. MacGregor's observation but its relevance today to the largest Canadian banks and life insurance companies.

[For background on the reality of banks and insurance in Canada see also, for example, in column nos. 33, 34, 47, 48 & 69.]


Alastair Rickard


Thursday, September 16, 2010

(No.113) Manulife & Sun Life: a safety parallel?

In the Globe and Mail's Report on Business (Sept.9) financial services reporter Tara Perkins wrote about her conversation with CIBC World Markets analyst Robert Sedran.

The premise of this "Tip Sheet" column was that while "the Street is concerned that Manulife Financial Corp might have to raise common equity capital yet again, ... Sedran sees a potential alternative: regulatory forbearance." Postulating his potential avenue of relief for Manulife Mr. Sedran pointed out that " Easing the regulations wouldn't be without precedent. In the early 1930s more than 40% of Sun Life's assets were common stocks. The insurer could have been in hot water were it not for a decision by regulators to allow a more generous interpretation of market values when marking assets to market, Mr. Sedran says. 'As a result the company survived a terrible environment throughout the Depression'."

Sun Life's financial situation following the Wall Street crash in 1929 was not just strained it was dire; in fact Sun Life was under water. Called upon in the Globe article as a parallel to Manulife's current financial challenge Sun's financial situation 80 years ago is, I suspect, one that Manulife's current CEO would not welcome.

Not incidentally both Sun and Manu have for most of their corporate lives operated as stock companies (except for a period of 40 years or so after they became mutual companies in order to avoid foreign takeover and then demutualized a decade ago).

At the time the Great Depression arrived in Canada Sun Life's czar was Thomas Bassett Macaulay who, since 1908 when his father handed him the reins of Sun Life, exhibited a self-confidence that makes the arrogance of some current and recent CEOs look almost reticent. The relevance here is to his conviction that, unlike other Canadian life companies, Sun was going to achieve major success based on highly risky investing of an ever greater proportion of its assets in the stock market. As I recall he ended up taking the proportion of Sun Life's assets invested in the stock market to well above 40%.

When the stock market crash occurred Sun Life did not go publicly to "regulators" in Ottawa in the modern fashion (as when Manulife's former CEO went publicly to Ottawa seeking regulatory relief on reserve requirements for the guarantees on its variable annuities). Sun Life quietly sought help from the key person -- the federal Superintendent of Insurance. The Sun Life episode occurred long before this senior and prestigious role was eliminated in the bureaucratic creation in 1987 of the Office of the Superintendent of Financial Institutions. Indeed the Superintendent of Insurance had long enjoyed deputy minister rank and reported to the Minister of Finance.

As former federal Supt. of Insurance K.R. MacGregor related the episode to me:
Sun Life's liabilities far exceeded its assets after the crash and it came quietly but desperately seeking the Superintendent's help (that was how regulatory problems were handled in those days). The other Canadian life insurance companies feared for their reputations with the Canadian public for safety and solidity and, while very angry about Macaulay's recklessness and the potential for collateral damage, wanted Sun rescued.

Out of the public eye the federal Supt. of Insurance had already rescued (and would again) smaller life insurance companies by quietly insisting that larger life companies take them over and assume their business. That method of preventing public insolvencies and losses to policyholders was a major reason why the industry could claim, pre-Confederation Life debacle, that no policyholder of a federally regulated life company had ever lost a dime. Sun Life was too big for that course of action.

What happened was that Ottawa shielded Sun Life from a public insolvency until Sun had time to recover its financial equilibrium. In fact this protective action went well beyond "easing capital requirements" and lasted until Sun had time to climb out of the financial hole Macaulay had dug for it in the stock market and reach a point at which its assets exceeded its liabilities.

Footnote: some years ago I was told by a reliable source that decades later Ottawa quietly assisted several life insurance 'brokerage' companies for a time on what had become their serious capital deficits in the level of reserving required for the billions of dollars of badly under-priced risk (and therefore under-reserved) 'first generation' lapse-supported Term-to- 100 business.

This is a subject I addressed occasionally during the years in which I published and edited The Canadian Journal Of Life Insurance. I also emphasized, as I do again now, that Sun's near death experience had a profound cultural influence down the years on Sun's senior management. In the post-crisis years it seemed that Sun Life could never have too much surplus. Sun Life's senior management style was very firmly on the side of conservative financial management. 'Safety first' became a part of Sun Life culture, one that has continued to this day.

Case in point: in contrast with Manulife whose former CEO, in the interests of jacking up company profits, ceased in 2004 to hedge its risk on the truckloads of guaranteed variable annuity business it was selling, Sun Life did not cease its hedging.

Another footnote -- on life company investments in Canada: the risk to the entire Canadian life insurance business in terms of public confidence by what Sun Life had brought down on itself ca. 1929 ff. and -- by inference -- on other Canadian life insurance companies was a major issue for the industry. The result was that the major companies went to the federal Supt. of Insurance (sotto voce, of course) and made clear that they wanted action taken that would prevent a Macaulay-like aberration occurring again. They requested a low limit be put in place severely capping the % of a life company's Canadian assets that could be placed in stocks. And it came to pass.

Many years later when I joined the industry I found it mildly amusing, as did K.R. MacGregor himself, that senior managements of federally regulated life insurance companies were by then pissing and moaning about the federal restriction on a company's stock market investments, a limitation the companies themselves had requested.

The reality of the life insurance industry's history was by then as much a blank page to the CEOs of that day as it is to most of their successors today.


Alastair Rickard


Sunday, September 5, 2010

(No.112) Gaming the system in hotels & life insurance

An article I saw in an economics journal looked at how companies hide fees and costs. The two authors (economists) concluded that sophisticated consumers have learned how to 'game the system' by having enough consumers around to subsidize them.

For example: you are attracted by an offer for a room at Hotel Nirvana for $75 a night, a room which costs the hotel $100 to provide. The person checking in behind you will rack up $70 in fees from the mini-bar, the phone and hotel parking (all of which cost the hotel $20 to provide). You used none of these. Hence the other person subsidized your room.

But getting cheaper goods and services subsidized by the uninformed consumer works as long as the sophisticated consumer knows what he or she could be charged. And it does not pay if too many people know the same thing.

But that may not be as big a problem as one might think since research has shown that even the most knowledgeable people can make dumb decisions although they have been provided with all the information they need to avoid doing so.

How does gaming the system play out in the life insurance business? Let's use first generation Term-to-100 policies as a case in point.

When T-100 policies based on lapse-supported pricing were introduced in Canada, the pricing badly over-estimated the level and rate of policy lapses that would occur. These policies were sold on the basis of offering lifetime protection but assumed -- indeed demanded from the perspective of the issuing life insurance company's financial interests -- that many Term-to-100 policyholders lose their lifetime protection and the sooner they lost it the better.

The sophisticated consumer held on to these policies -- and if you dear reader have an early Term-to-100 policy, hold on to it; it is worthy of Mark Twain's advice about land ("they are not making any more"). This created real challenges for those life insurance companies which had jumped into this market with what turned out to be seriously under-priced policies and thus tried to promote lapses of these policies or had to increase reserves on them or both.

Who were the life insurance consumers most likely to have held on to these policies, to have been sufficiently sophisticated to have refused to replace or lapse them? In my experience it was most likely to have been those policyholders who had career agents and brokers who were not only professional and gave good advice to clients but who themselves were sophisticated enough to appreciate what was happening with the companies and these policies.

In terms of this under-priced first generation T-100 business the better-managed companies pulled back. Great-West Life even pulled out of T-100 altogether providing an admirably frank explanation to their sales people of why the action was being taken.

A few companies tried to address insufficient lapses of their policies by going beyond promoting replacement of their T-100 policies by sales intermediaries to a tactic such as failing to send out an annual premium notice/reminder in the hope that the policy would lapse for lack of a timely payment of the annual premium.

A very successful and experienced Toronto life insurance broker, the late David Cowper, told me of a case where a client had a large T-100 policy (one sold to him by another broker). Cowper advised him to diarize when his policy anniversary date was and be sure to pay the annual premium promptly since he might not receive a timely premium notice if the company sought to have him (inadvertently) lapse his policy. Sure enough the policyholder received no notice but, thanks to Cowper's warning and advice, paid his premium on time anyway.

In this example, in terms of gaming the system -- and dealing with a company trying to game the system in its own interests -- both the policyholder and the broker understood that the price of this particular policy would have to be subsidized by other policyholders of the company and therefore that the company might seek to generate relief for itself.

And this fact underlines a reality of the life insurance market-place as real today as ever it was: some of the policies sold by life companies designed and priced to compete for market share and impress the financial services paparazzi with the company's volume of new business actually return low or no profit.

The premiums charged for such policies are, like the hotel room in my example, subsidized by (among others) the purchasers of life insurance policies priced by the company to actually return an adequate profit, say, a 15% ROE.


Alastair Rickard


Wednesday, September 1, 2010

(No.111) Did the critics see the same "What The Butler Saw"?

The previous column on (No.110) dealt with Englishman Joe Orton's 1969 play What The Butler Saw now being performed (through Sept 18) in Toronto by the Soulpepper Theatre Company. Last summer Soulpepper had presented a production of the Orton play Loot.

Our column reviewing What The Butler Saw was posted Aug.25. We prepared our review before the publication of those of the theatre critics of the major daily newspapers in Toronto.

It is sometimes interesting for us to compare our views of a play with those of these critics as well as comparing their reviews (see for example "Duelling critics over An Ideal Husband", Column No.96 on, posted June 3, 2010).

While Pat and I agreed that What The Butler Saw "is a worthwhile evening at the theatre", she "liked it somewhat more than I did." Among the trio of Toronto theatre critics, two liked it less than we did and one perhaps somewhat more.

Here are some illustrations excerpted from their reviews:

Robert Crew in The Toronto Star, Aug. 26, 2010:

"Back in 1969, when it first produced, ... it was hailed (by a few) as a black farce par excellence, an outrageous peek at modern society at its most insane.

"Forty years on, the same material does not play well at all. What once seemed cutting-edge and daringly shocking now seems distasteful and jejeune.

"And right from the get-go, the cast seems struggling to find the seam of humour that everyone assures us make this play Orton's masterpiece. ...

"The cast is a good one and the director, Jim Warren, usually has the surest of touches with this kind of comedy. But everyone -- without exception -- is pushing too hard to find the humour and put it across. There is lots of shouting and squawking and slapstick but to little avail."

[The Star's rating of the play was 1 1/2 stars out of 4 ]


J. Kelly Nestruk in The Globe and Mail, Aug.27, 2010:

"Following up on his popular production of Loot at Soulpepper last summer, director Jim Warren is taking another stab at the outrageous oeuvre of Joe Orton. But while he gts a few satisfying spurts out of What The Butler Saw, Warren misses the major arteries this time around. ...

"More than 40 years on, What The Butler Saw's grotesques retain their ability to entertain and outrage on the page. But this dark comedy is difficult to transfer effectively to the stage. Not only do Orwell's epigrams run the risk of sounding overloaded when spoken, but they must be delivered in the midst of farcical physical comedy. ...

"Warren's production is probably still worth a visit ...."

[The Globe's rating of the play was 2 stars out of 4]


Robert Cushman in The National Post, Aug. 31, 2010:

"Joe Orton [is] the young playwright famously dubbed 'The Oscar Wilde of the welfare state' .... The play ... reached the stage in a posthumous unrevised state, the source of some of its charm and some of its untidiness.

"Jim Warren's Soulpepper production is very lucid, which in this play is both a virtue and a vice. .. Warren gets the Orton tone more consistently than in last year's Loot, but not the tempo ....

"There is one triumphant performance: Graham Harley, resisting all temptation to play for eccentricity, makes [Dr.] Rance the ultimate civil servant. ... Blair Williams [as Dr. Prentice] exemplifies the good and bad in the production."

[ The National Post does not use star ratings in its theatre reviews]


Alastair Rickard