Tuesday, February 22, 2011

(No.138) Sun Life's Canadian jewel

On Feb.16, 2010 Sun Life Financial released its results for the 4th quarter of 2010 and the year 2010.

Perhaps only certain members of the investment community and the financial services paparazzi could fail to be impressed by the reality of Sun Life's results: 2010 net income of $1,583 million compared to $534 million in 2009; a return on equity of 9.9% in 2010 up from 2009's 3.4%; the fact that at year end 90+% of Sun's variable annuity and seg fund policies were included in its equity hedging program.

How was this reality reflected in Sun Life's share price? An immediate drop of a dollar or so a share, i.e., the usual level of market rationality.

I won't attempt to review here the quality of the 'analyses' of the Sun 2010 results. Still, a few points occur to me which readers are unlikely to have read elsewhere.

When I was an executive (minor) in the Sun Life international empire, my position having resulted from Sun's takeover of Clarica Life (i.e., the demutualized Mutual Life of Canada), I very soon tired of hearing variations of the official Sun Life sermon: Sun is a major international company; Canada is just a small population, comparatively minor market for Sun; the future is Asia (and to some extent the U.S.), etc, etc.

The logical leader of this message was and is Sun's CEO Donald Stewart, a man I respect for his integrity, personal demeanour and the way he treats people. I did not and do not dispute the significant potential of the Asian markets for Sun, especially in China and India. However market size and net income, like selling and writing profitable insurance business, or the professionalism and productivity of Sun's Canadian career agents compared with policy pedlars overseas flowing in and out of the system monthly by the thousands [sic], are not synonymous.

I did question Mr. Stewart in company forums about what I regarded as the need for Sun to 'invest' in the Canadian operation, in particular its career agency distribution system. Why? Because Sun's Canadian operation was and still is the source, disproportionately given the size of the various markets in which Sun has a presence, of more than half of Sun's total profits.

I recall, for example, asking Donald Stewart at one company meeting how long he thought it would be before Sun earned a 15% ROE on its operation in mainland China. It has had for much longer a retail operation in Hong Kong. Sun's interest in its 1999 joint venture in China, Sun Life Everbright, was "restructured" in 2010 and Sun's ownership interest reduced to 24.9%.

In my view there continues to be a tendency for the spoken and written rhetoric emanating from Sun's senior management to understate, even to largely ignore publicly the actual importance to the company of its Canadian operations because of its dedication to playing up in an overweening fashion what it wishes viewed as the wonderfulness of its Asian operations. In part I think this is because Manulife, long the company Sun has regarded as its archrival, has dined out on the image it has promoted of its own supposedly fabulous Asian operations.

Manulife has tended to get too easy a ride from analysts on (among other subjects) the problems its Asian operations have had over the years. For example, I recall one Manulife senior executive sharing with me fascinating tales of the shambles Manulife got into in its Japanese operation. Look in vain for realistic media reports about this. Also, in fairness to Sun it has long been more forthcoming than Manulife in providing realistic and useful numbers about where its profits and losses are actually coming from, operation by operation.

Back to Sun's results: my argument remains that Sun needs to divert a little of the 'investment' it pours annually into its still marginal sources of profit in Asia (2010 net income from its Asia division of $92 million or 1.5% of Sun's total), divert some into the Canadian operation (i.e., to the operation which in 2010 generated 52% of Sun's total net income) and especially into its Individual operation which in turn accounts for about half its Canadian net income total.

It would have served the cause of clarity and disclosure if, in its 23 page Feb. 16 news release about its 2010 results, Sun had diluted just a bit its enthusiastic rhetoric highlighting the performance of Birla Sun Life in India by telling readers that Sun has only a 26% interest in this 1999 joint venture with the Birla family, one of India's wealthiest [ditto Sun's 24.9% interest in Sun Life Everbright in China].

Even if Indian law were to be changed to permit a larger or even majority non-Indian ownership in such Indian companies, I very much doubt that Sun's interest would increase. Indeed a director of another of the Birla companies told me he thought the Birla family, while they would be happy to buy out Sun's interest in Birla Sun Life, would never sell a greater ownership interest to Sun. They have certainly benefitted from the money, expertise and experience Sun has put into the joint venture based on only one quarter ownership.

As for the Sun Life Financial Canadian operation's results for 2010, in mid-January I wrote that "I would not be surprised if [Canadian president] Kevin Dougherty leads the Canadian individual operation [to which he returned in Jan. 2010] 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." [see Column No.132 on RickardsRead.com]

In fact I think there were handicaps in 2010 but they were at least partially overcome. It seems that the individual premium sales made by Sun's career agency system (i.e., the system it bought when it took over Mutual/Clarica) accelerated in the 4th qtr of last year and their sales plus some by the brokerage arm did exceed $200 million in 2010. The primary credit of course belongs to the career agents who actively sold this core product but some credit also belongs to the leadership provided by Dougherty and his Individual operation team led by Kevin Strain and Vik Kazazian.

In 2009 I wrote a 5 part series of columns commenting critically on the problems and performance of Sun Life's operation, particularly in Canada (RickardsRead.com, see column Nos. 50,52,60,61 and 62). I ended the last column in the series, dated Nov.6, 2009, with the following:

"Sun still has in place in Canada the essential elements of a successful career agency distribution system. This is an asset which few companies could or would attempt to create these days for reasons of cost, degree of difficulty and executive incapacity in career agency management. It remains to be seen whether at the end of the day the potential of Sun Life's career system will be enhanced or dissipated."

In terms of the rebuilding of an appropriate focus, sales force morale and support of its Canadian career agency system to what it once was and could be again, 2010 was a promising start but only a start. Since Kevin Dougherty's return to head the Canadian operation on Jan. 1, 2010 the direction of the career agency system and a positive response by many of its members as the year went on is indeed evident in the 2010 sales results. It should be noted that there were some positive signs prior to 2010 including (finally) a bit of 'extra' operational budget money for the career system.

But one swallow does not a summer make. The effectiveness of a superior career agency distribution system is constructed over a long time but can be dissipated quickly as in fact was the case because of Sun actions following its takeover going on a decade ago and its subsequent direction of the Mutual/Clarica career system. The status quo ante will not be rebuilt in any lasting fashion in a year or two.

Imagine the potential for growth if Dougherty has available to him as an 'investment' by Sun Life corporate, as an extra non-operational budget allocation, anything like a real taste from the bucket containing the millions of dollars Sun pours annually into its Asian operations -- however small in comparison to what Sun's Asian operation absorbs every year. These dollars could be used to strengthen the quality of what Dougherty himself publicly recognized after he began his first stint (in 2004) as president of Sun's Canadian operation as not just the jewel in Sun's Canadian crown but a big part of the crown itself; he was referring to the Mutual/Clarica/Sun career agency distribution system.

In terms of that distribution system's relative importance to Sun in Canada, it was fundamentally important then and it still is. Properly led and supported it will produce reliable, predictable, growing and profitable business. Perhaps Dougherty will be allowed by those who know less about successfully selling life insurance in Canada than he does to get on with it based on sufficient resources -- even if they do have to be diverted from marginally profitable or unprofitable operations Sun Life has outside Canada.

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for detailed 2010 Sun Life results see:

www.sunlife.com

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Alastair Rickard

RickardsRead.com

email: Alastair.Rickard@sympatico.ca