Tuesday, May 24, 2011

(No.153) Sun Life numbers: kumquats & apples

I was looking at several Sun Life Financial documents for 2010 the other week and doing some calculations of my own. There were several numbers that were particularly interesting to me, in some instances because they illustrated points I have been making over time about Sun Life's operations in Canada and elsewhere. These points were made while I was working at Sun and more recently in columns posted on RickardsRead.com.

It does not seem adequately appreciated by many among the financial services paparazzi who 'follow' Sun Life for the market and the financial media that Sun enjoys an advantage over its major Canadian-based 'international' rivals (Manulife and Great-West). Sun has a proportionately large, reliable and very profitable Canadian operation as a foundation for its worldwide operations, one on which it can and has relied.

It has been there, to Sun's great financial benefit, while it has pursued with decidedly mixed results its international activity in the U.S. and Asia, the sort of 'exciting and visionary' activity which seems to so impress the usual elements of the media and the market-place. For example: for the 6 years 2005 through 2010 57.3% of Sun's total net income came from its Canadian operation; in 2010 alone this proportion was 52.3%.

I emphasized in Sun Life internal discussion in which I participated as well as in these columns the importance to Sun Life of its Canadian Individual business unit's operation, particularly the career agency system distribution system it acquired when it bought Clarica Life (formerly the Mutual Life of Canada) and the need to invest in it. Sun Life itself beginning in the 1990s had, in its Canadian operation, gradually consigned its own career agency system to extinction -- although admittedly it did not have a top tier career system.

How important is the career distribution system in the current success of Sun's Canadian operation? New individual insurance premium increased 20% to $201 million in 2010; individual insurance and investments (annuities/mutual funds/GICs) accounted for $409 million in common shareholders' net income (up from $224 million in 2009) compared to $419 million from Group Wealth (pensions) and Group Benefits combined.

In selecting numbers to illustrate its operations Sun Life occasionally mixes apples and kumquats. For example: in its annual 'show and tell' it lists its own "employees worldwide" and states that it does not include employees of Birla Sun Life in India (Sun has only a 26% ownership interest) and Sun Life Everbright in China (a 24.9% interest).

Yet in listing its "advisors worldwide" Sun is pleased to show all the agents attributed to Birla Sun Life in India: 153,395 at the end of 2010. A very large number although far less important than it may seem if one is thinking of this huge agency contingent in terms of it being comprised of career agents in the sense of Sun's Canadian career system. It isn't.

I do not doubt that thousands of sales people do indeed flow into Birla every month as surely as thousands flow out. I would be surprised if Birla Sun Life's 4 year agent retention rate is even 1% (if they tracked and reported it on the LIMRA basis; Birla Sun Life is not among the LIMRA member companies in India). By comparison the highly superior 4 year retention rate for Sun's Canadian career system is currently 30% -- roughly twice the usual North American industry average -- and still increasing (the Mutual Life career system hit a high of 40%).

A footnote about agent retention rates for those both in and out of the industry (i.e., in fact nearly all in my experience) who do not really understand what those retention rates actually represent. The only reliable industry source is an annual study by LIMRA, the Life Insurance Marketing & Research Association. Its annual numbers based on member company reporting to LIMRA track the rate of agents still with the same company 4 years after joining, not agents still in the business with other companies or as brokers/'independents'/salaried agents et al after 4 years. These 1-4 year agent retention rates are not, as some industry critics have long misunderstood them, a measurement of people who enter and then leave the business of selling life insurance -- although many will have.

At the end of 2008 (Dec.12) Sun Life sold its interest in the mutual fund outfit CI Financial to the Bank of Nova Scotia. It was a timely and a very smart move by Sun for a number of reasons, not least because of the kind of problems Scotiabank is now having with CI. Sun Life had acquired its substantial interest in CI (approx. 1/3) not long after its takeover of Clarica Life. To buy it Sun traded its own mutual fund operation plus the larger one it had acquired with Mutual/Clarica for its CI interest. Sun had a pre-tax gain of $992 million on the sale of its CI shares and $805 million net of taxes.

CI Financial, as I have pointed out previously on RickardsRead.com, had (and still has) a sweet and too cheap ride with Sun in terms of enjoying preferred access to the Sun career agency sales force. Although a life insurance sales force in terms of its core products the Sun career system proceeded to place a great deal of mutual fund business with CI, at one point accounting for 2/3 or so of CI's annual net sales.

The strong push by CI for mutual fund sales from Sun agents embraced among other things an ongoing major promotional effort conducted by CI with Sun agents, often in Sun's agency branch offices (a presence and activity which Sun's agency managers were not allowed by Sun to limit or effectively manage in the interests of higher life insurance sales). All this CI activity and its increase in mutual fund sales by Sun agents came at a price to Sun which its senior non- agency executives either never seemed able to understand or chose to ignore.

Part of that price was a lower level of individual life insurance sales than would otherwise have come to Sun. For many career agents, especially established agents under the Mutual/Clarica/Sun lifetime level commission system, it was more attractive to focus on the sale of CI's mutual funds -- worthwhile activity for clients to be sure -- than on making life sales. It was, therefore, no mystery that the effect created by CI's promotional, incentive and compensation approach with Sun agents had a distracting and negative effect on the sale of Sun's own individual life insurance products from which Sun, as the manufacturer and distributor, derives all the benefit.

And what did Sun get by way of non-dividend annual returns from CI Financial in exchange for access to a large, national and proprietary sales force that CI on its best day could otherwise never dreamed of having? Far too little for far too long.

In terms of distribution fees, for example: $144 million in 2007 and $129 million in 2008, too little of which actually trickled down annually through the Sun corporate financial sieve to support (much less enhance) the Sun career agency distribution system. Those fees, had they been twice as large, would still have been a bargain for CI since its mutual fund success is, like so many most others in that business, fundamentally rooted in successful distribution of its product in a competitive market.

But instead of forcing CI Financial to make an appropriate financial contribution to the enhancement of the career agency distribution system on which it depended for so much of its quality mutual fund business, sales success which had the effect of handicapping sales of Sun's own life and asset products, Sun 's senior management chose not to use its very considerable leverage to force the issue with CI.

After sale of its CI Financial ownership interest Sun finally got around to providing its Canadian agents with a Sun-owned alternative mutual fund portfolio. It has been greeted, on the whole, with something much less than enthusiasm by most of its agents active in mutual fund sales. CI is holding on to its share of new mutual fund business sold by Sun Life agents. No surprise there after years of Sun's career agents' mutual fund playing field being tilted so markedly in favour of the (still) dominant CI Financial as mutual fund supplier.

The signs for 2011 sales by Sun Life's Canadian agents are positive. Their record sales in 2010 evince a positive momentum too long absent because, in part, of declining sales force morale and trust. Another indication came at the recent annual convention for Sun career agents in Hawaii, the sales qualification for attendance being based on 2010 activity. It saw almost a doubling over 2009 of agent convention qualifiers -- approx. 950 compared to 500.

The career agents' embrace of the new Sun participating whole life policies (too long absent from their product portfolio in the post-demutualization period when only the maximizing of value to shareholders seemed to count) did not really even begin to contribute to Sun's record individual sales for 2010 until the autumn. In 2011 the par policies are already a major sales factor: in the first quarter this year sales of individual life and health insurance increased by 21% over Q1 2010.

In contrast to this positive product development Sun's Canadian brokerage distribution of individual life insurance is still selling too much of what it has for too long depended to compete for so-called broker business: the old and under-priced Sun universal life product on which it had relied to compete for sales in the brokerage market before it acquired the Mutual/Clarica career agency system. In 2011 I suspect that Sun brokerage might account for 20% of new individual insurance sales although not that high a share of true profit resulting from new individual policy sales.

Finally, a reminder to all those in (and interested in) the Canadian life insurance business: at the end of the day success is at root about "selling stuff". On that basis alone 2011 seems likely to be a very good year for Sun Life sales in Canada.

by Alastair Rickard


email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com