Saturday, October 1, 2011

(No.173) Manulife myth & Sun Life reality

I have watched and commented in these columns on the disgraceful conduct of various financial services company CEOs and their senior 'team members'. It should have come as no surprise to the supposed 'experts' that the mixture arising from the pursuit of financial self-aggrandizement, incompetence and the willingness to play fast and loose with other people's money formed a mixture toxic in its consequences, one that in the case of too many U.S. and European financial companies was genuinely poisonous.

Canada's financial services marketplace had and still has its share of incompetent, risk-taking senior managers masquerading before an audience of media and analysts as visionary leaders. However in Canada there existed what was absent in the U.S. and Europe: vigorous solvency regulation combined with effective and active enforcement.

It was this regulatory reality that was largely responsible for Canada's favourable record post-2007 financial meltdown. Canadian bankers occasionally become restive with some of the strictures of regulation. They have objected in the past and still do (for a very recent example see the public disagreement on further tightening of regulation between the CEO of the Bank of Nova Scotia and the Governor of the Bank of Canada). The favourable record of Canada's financial sector has provided an opportunity for Canadian bankers to take bows which mainly belong to those who kept them from aping their international peers: the federal financial regulators.

The bulk of my years as a life insurance executive (as well, in my spare time, as a writer, public speaker and editor of the Canadian Journal of Life Insurance) were spent at the head office of Canada's first and only major life insurance company operated anything like a true mutual owned by its participating policyholders: the Mutual Life Assurance Company of Canada (founded 1868). Its name was changed to the rather silly Clarica Life when, unwisely and unnecessarily, it was demutualized early in 1999 at the instance of its senior management, an action that set the stage for the Dec. 2001 announcement of Clarica's takeover by Sun Life and its inevitable subsequent disappearance.

Although Mutual Life had gradually fallen under the sway of certain senior executives and uninformed directors who never really believed in, much less supported mutuality, many people in the company believed in mutuality and supported its continuation as the best way to serve the longer term interests of its policyholders as well as preserving its independence. That latter group included me.

It was against that background that I became an unenthusiastic passenger on Sun Life's takeover train transporting the corpus of what had recently been a superior mutual company owned by its par policyholders (who made up virtually all of its policyholders) to a place where shareholder interests routinely trump those of policyholders.

It wasn't long after I alighted at the Sun Life station that I observed first hand a variety of things about which I had heard before. One was the almost visceral competitive feeling between some people at Sun and those at Manulife.

I did not find this atmosphere off-putting since I had never been a fan of Manulife. Indeed, as editor of CJLI I had created an award I dubbed the Sir Mackenzie Bowell Award named after Canada's least distinguished prime minister (Dec.21,1894-April 27,1896). I awarded it periodically to recognize particular instances displaying an absence of excellence involving the Canadian life insurance industry.

One of my award's recipients had been a CEO of Manulife. It was intended to recognize his having made what I regarded as a mockery out of the practise of mutuality. (Manulife along with Sun Life, Confederation Life, Canada Life and the much smaller Equitable Life of Canada were then all still mutualized former stock companies which had become mutuals in the late 1950s/early 1960s as a way of avoiding foreign takeover. Equitable Life remains a mutual to this day.)

As an emotionally detached 'inside' observer of this culture of corporate competitiveness I was interested by the envy sometimes on display in certain quarters. When Manulife was selling truckloads of guaranteed variable business but Sun much less of this type of product I would smile as I heard certain Sun Life executives lament the fact that Sun trailed Manulife in what was a self-evidently risky market and indeed a less attractive one than some others. Before long it turned out this product would have rather different impacts on the two companies.

All of this came to mind as I read yet another article about Manulife by Tara Perkins in the Globe and Mail's Report on Business (Sept. 24, 2011). I have written a number of columns about Sun Life including its shortcomings as well as about the extent to which Sun has been shortchanged in comparison with Manulife in the financial media (see the list at the conclusion of this column). The Globe's ROB, like most of the financial press, has long devoted a much greater number of column inches to Manulife than to Sun Life and, as the absence (pre-financial ditch) of red flags attest, with little compensatory advantage to readers.

Indeed various elements of the financial services paparazzi -- at least until Manulife went into a deep financial ditch and its then CEO Dominic D'Alessandro went crying to Ottawa to seek regulatory relief for the situation in which the company had put itself as the result of its risk taking (and got less than he sought) -- had habitually preferred to breathlessly report the wondrous performances of both Manulife and its eminently quotable CEO. (I note in passing my understanding that during D'Alessandro's imperium his successor as CEO, Donald Guloien, was at his right hand filling the role of 'Little Sir Echo').

Donald Stewart, CEO of Sun Life and far from a pursuer of media attention, was never so appealing a subject for this crowd.

I was amused by how the applause for D'Alessandro's comments about and 'leadership' of Manulife managed to drown out mention of negatives. For example: of how, in order to inflate Manulife profits, the cost of protecting the company by hedging the considerable financial risk arising from the sale of huge volumes of guaranteed variable business was eliminated through ceasing to hedge beginning in 2004 -- at a subsequent cost to the company measured in the billions of dollars, and counting. Meanwhile at Sun Life, with Donald Stewart as CEO, the hedging of the same type of product risk continued.

In the Sept. 24 Globe ROB article a securities analyst essayed the useful suggestion that Manulife should sell John Hancock Life of Boston which it had purchased for $10.4 billion in 2004 (a mere coincidence of timing ref. Manulife's hedging decision?) and realize funds with which to further gird its financial loins as it faces yet more losses arising from its 'risky business' which even today is still only 60% hedged. He didn't mention such money-losing aspects of John Hancock's operation in the U.S. as its in-force Long Term Care business.

I invite anyone with nothing better to do to revisit the uncritical, almost fawning reception that Manulife's purchase of John Hancock Life received in most quarters of the media and securities communities as the activities of the two D'Alessandros (Dominic of Manu and David of John Hancock) titillated their followers. Still, there were rather more than a corporal's guard of people around who knew something about the reality of the North American life insurance business and who were able to point out at the time (had they been asked) that Manulife was overpaying significantly for a company that was in decline -- but, where never is heard a discouraging word .... until of course the post-2007 meltdown loomed.

The most recent market reversion to downturn once again challenges Manulife's financial position, one which has already experienced the loss of $billions and is looking at still further possible losses this year in the hundreds of millions of dollars. Which brings me back to Donald Stewart of Sun Life.

Stewart will retire as Sun Life Financial's CEO on Nov. 30 this year. During the time I worked for Sun I did not spend much time with him but, as I have written previously, I liked and respected him, particularly the way he treated people even as I disagreed with some of what he said and did as CEO.

It should be more widely recognized by the so-called experts on the life insurance industry that, while D'Alessandro of Manulife was better copy as he performed his crowd pleasing leadership pirouettes for the media and the market (from those performances the financial chickens are still coming home to roost), Donald Stewart was quietly doing what shareholders and policyholders were entitled to expect him to do: protect Sun Life and its future.

He brought Sun Life Financial through a very dangerous period for the North American and European financial system and did so with stability, minimized losses during the Wall Street generated crisis and without serious speculation then or now about the company's future financial stability. By comparison with what has occurred involving some financial institutions in the U.S. and Europe since 2007 -- and at Manulife -- that is no small achievement.

Let it also be said that Donald Stewart will leave Sun Life as a company whose financial condition in a still tumultuous period can be regarded confidently by its various stakeholders as one that will not be the victim of a Manulife-style financial roller coaster -- provided his successor Dean Connor is as careful and as thoughtful a CEO as Stewart has been.

That is the Sun Life reality as distinct from the Manulife myth of superiority so readily swallowed by those whose business it was to have known better. Eventually a marketplace with too little understanding of the realities of the life insurance business here and abroad may yet awaken to that important distinction.

by Alastair Rickard


to read other columns on the subject of Manulife and Sun Life posted this year to, see for example:

No.132, posted Jan. 15, 2011, "Sun Life & Manulife: returns and departures"

No.149, posted April 28, 2011, "Sun Life & Manulife: bye-bye retrocession"

No.153, posted May 24, 2011, "Sun Life numbers: kumquats & apples"

No.143, posted March 29, 2011, "Manulife = another Elvis sighting"

No. 138, posted Feb.23, 2011, "Sun Life's Canadian jewel"




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