Saturday, January 15, 2011

(No.132) Sun Life & Manulife: returns & departures

I have referred previously in RickardsRead.com to the benefit derived by the 3500+ member Sun Life career agency distribution system in Canada -- to its morale and therefore to its sales -- of having Kevin Dougherty return in Jan. of 2010 to the presidency of Sun Life Financial Canada, a role he had held 2004-7. Apart from his other qualifications as a senior executive he has understanding of and empathy for both career agents and the job of selling and, just as important, is seen by Sun's Canadian sales force to have these characteristics.

Agents have highly developed bullshit detectors and they can be a tough audience. Many an executive over the years has thought he could fake bonhomie with sales people and discovered he could not and that an insincere hail-fellow-well-met posture merely served to lose even more of what little credibility he had at the outset of his tenure. Nor is there any way to predict with any certainty who will enjoy sustained credibility with a sales force.

I have spoken and written of my high regard for former federal Supt. of Insurance K.R.MacGregor who became CEO of the Mutual Life of Canada. He was as fine a gentleman as I ever encountered in the business as well as being as unlikely an individual as one could imagine to strike a chord with a room full of agents but his modesty, integrity and quiet demeanour (among other qualities) somehow led agents to connect with him. I saw them give him standing ovations for little more than approaching a podium to say hello. He had both popularity and credibility with them by being himself.

Many years later I witnessed something reminiscent of that at an agent's convention in Whistler BC attended mainly by Mutual Life/Clarica Life agents. It was held not that long after the Sun takeover of their company. Sun Life CEO Donald Stewart who, as I have written previously, reminds me of K.R. MacGregor more than any other CEO I have known or known about over the years, was in attendance at the Whistler meeting. I had also been present when earlier that year he had received a far from friendly reception in Toronto from a ballroom full of Sun's 'independent' sales people who had been called to the meeting and invited to join the Mutual/Clarica career agency system, one of the major assets Sun had acquired with its purchase of Clarica Life (the demutualized Mutual Life).

At the Whistler convention Stewart received an ovation from the career agents when he was introduced. But I digress...

When they have been announced next month the 2010 results for Sun Life's Canadian individual operations, especially of Sun's career agency system, will in my opinion reflect in part the return of Dougherty to head Sun's most important profit centre -- its Canadian operation.

I expect Sun's Canadian new individual life insurance premium in 2010 to have increased substantially year over year with a significant net gain for the year in the size of the career agency sales force. Sun's brokerage operation (still selling a significant amount of the old, low rate of return Sun universal life policy designed to attract brokerage business) plus its manufacture of products for other financial institutions will likely account for less than a quarter of the total on the individual side.

If so then the leadership of Dougherty plus Kevin Strain and Vic Kazazian in the Individual operation will deserve considerable credit for having made it, as any wise agency leadership team must, a bit easier and more encouraging for agents to make sales -- and then at least trying to get the company out of the way of their doing so.

For the Sun Life Canadian career agency improved performance to continue in the direction of what the Mutual/Clarica system once was, Sun Life Corporate management needs to allow Dougherty sufficient funds and management freedom to continue improving the morale and sales productivity of the Canadian operation.

By this I mean (for example) eliminate or at least minimize stupid, morale harming, expensive, money losing, resource diverting 'initiatives' -- such as last year's to try to sell term insurance directly to consumers in a pathetic but morale deflating competition with Sun's own agents, i.e, with those people on whose efforts the company mainly depends at the end of the day to generate profitable individual business in Canada.

I do not believe for a second that Dougherty would have taken this step in 2010 if not directed or pressured to do so as part of Sun Corporate's delusional commitment, in order presumably to demonstrate 'vision' (always important to executive career management), to 'direct marketing' -- to hell with losing some agent sales.

As I have argued in RickardsRead.com (and formerly in person within the company as a member of Sun management) Sun needs to divert annually to the enhancement of its Canadian career agency distribution system just a sliver of the mega-millions of dollars it pours year after year into its low or no return Asian operations. In any business environment continually in touch with its own reality, e.g., that Sun's business is about 'selling enough stuff' and doing it profitably, such a diversion should be regarded as an investment in its Canadian agency operation, which in turn provides so much of the motive power for its Canadian golden goose's annual laying of profitable eggs.

Finally I would not be surprised if Kevin Dougherty leads the Canadian individual operation to an impressive $200 million mark for new premium in a year -- and sooner rather than later -- provided he is not handicapped in doing so by Sun Corporate. That requirement may not be an easy sell, especially if those to whom the sale must be made persist in misunderstanding the nature and quality of the Sun career agency system in Canada in comparison with the nominal career systems in Asia of which Sun is a partial owner. In fact, by the usual indices of quality the latter more closely resemble, say, the Met Life debit system ca.1950 than Sun Life's own Canadian career agency system in 2011.

While on the subject of Sun Life I note that Donald Stewart, the CEO of Sun Life Financial, received full year 2009 earnings of $3,836,334. By comparison Donald Guloien, who became CEO of Manulife in May 2009, earned $9,658,433. In a rational business world there could be no justification for that differential in their compensation. [Remember: the Globe and Mail's Report on Business did not even descend from the mountain with its tablet pronouncing that Manulife had arrived at a "reversal of fortune" until Jan 6, 2011. One assumes this may have been less than soothing psychological balm for those in Manulife senior management given the company's mid-Dec 2010 rating downgrade by S & P and Moody's, the third decrease since early 2009.]

Clearly the Manulife board of directors still lives in the same parallel universe it called home when it lavished millions in special bonus money on departing CEO Dominic D'Alessandro after Manulife had ended up in a very deep financial ditch. If the Globe or the market analysts whose opinions it can be relied on to solicit and quote about Manulife's prospects think that Manulife's increased but far from complete hedging of its variable business financial risk is indicative of a "reversal of fortune" then there is also a future in creative writing.

As a footnote in this connection: Ottawa Citizen columnist Dan Gardner wrote a couple of interesting columns in December highlighting the failure of economists and related species of 'experts' as the authors of publicized but inaccurate predictions with which they are too rarely confronted after the prediction fails.

I particularly enjoyed a comment from one analyst cited in the Globe: Manulife, he said, was "reducing their earnings sensitivity, which is a number derived from their actuarial models. So it is the actuarial tail wagging the economic dog."

In fact it is more than unfortunate that back in 2004 Manulife's "actuarial tail" was not permitted by its senior management to wag the corporate dog when a decision-making point arrived and D'Alessandro decided, in the cause of further enhancing company profit, to cease hedging its financial risk on the $billions of variable risk policies it was writing. If competent, conservative and stick-in-the-mud Canadian actuaries had actually been in a position to make that key decision, it is a fairly safe bet that the magnitude of Manulife's financial disaster would have been avoided.

As for the predictions of relevant 'experts' I invite readers to search post-2004 for any substantive warnings from them about the real risk involved with Manulife's 2004 decision or indeed (quite apart from the foolishness of not continuing to hedge its investment risk) with the type of corporately foolish guaranteed variable contracts with the sale of which -- by the truckload -- the company's most senior management had become so enamoured.

You will search in vain.

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Alastair Rickard

RickardsRead.com

email: Alastair.Rickard@sympatico.ca