Friday, November 18, 2011

(No.178) Sun Life: nails & screws

Years ago, at a time in my life when I still thought I might follow my graduate studies in history all the way to a lifetime career in the academy (I didn't), one of my favourite historians was the English don Sir Lewis Namier.

Historians are every bit as waspish in their rivalries with peers as are (I later observed) business executives trying to climb the greasy corporate pole.

Namier once said of one of his distinguished peers that "the trouble with Herbert Butterfield is, he swallows a nail and shits a screw." It was an impolite way of referring to writing that is at best unhelpful, that addresses a matter that seems clear but obscures rather than clarifies it.

I recall Sir Lewis' comment when I think about the analysis and commentary in the past decade and more about Manulife on the one hand and Sun Life on the other. Too much of it has fallen into the familiar traps of sycophancy in the case of Manulife and disdain (or at best insufficient attention) in the case of Sun Life.

As I indicated in my last column (No.176) "Manulife jabberwocky" posted Nov. 13 and in a number of previous columns, e.g., "Manulife myth & Sun Life reality" (No.173) posted Oct.1, 2011 on, the management of the two companies, especially in terms of protecting financial safety, has been rather different. Yet for years many of the financial community's analysts and commentators buzzed around Manulife under its then CEO Dominic D'Alessandro like groupies around a rock star.

I receive emails from people associated with both Sun Life and Manulife following any column dealing with one or both of the companies. When Sun's CEO Donald Stewart sent an email to Sun employees on Oct 17, the same day the company announced in advance its anticipated loss in the 3rd quarter, it was not well received in some quarters within the company.

The context that needs to be understood is this:

Sun's senior management has gone out of its way to downplay its reliance on the profits from its Canadian operation in favour of a steady stream of blather about how wonderful are Sun's operations in the ever so much more important markets outside this country. When I was still employed at Sun Life my objection to this attitude was one of my frequently exercised hobby horses.

Sun's Canadian agents, managers and staff are, of course, fully aware of the extent to which they continue to provide financial support for the often money-losing Sun operations outside this country. As their operating budgets are squeezed they would at the least appreciate receiving rather more public and internal credit from Sun corporate management where it is due.

Its insufficiency does not serve the cause of improved morale. Consider as an example what a Sun Life manager wrote to me on Oct 18 (the official Sun Q3 results were not released until Nov.2):

"I think there is a story that is being hidden by Sun Life senior management and the advisors [i.e., Sun's Canadian career agents who generate the lion's share of its individual sales] are really suspicious what the real story is! In all past emails re quarterly results, the profit or loss per country was broken down so we could see where the worldwide results came from but they are completely missing this time. Also, this loss took everyone by surprise ....

"It is true that interest rates are low but no lower than the Q1 and Q2 when we had good profits. I wonder (and many advisers are also questioning) if somehow Sun Life erred in their hedging strategy and incurred large losses with respect to the stock market and the segregated funds.

"I am convinced that these guys are not revealing what exactly went wrong and now they are also projecting a huge Q4 loss. It will be only a matter of time before they squeeze expenses again in the Canadian operations to help reduce the real reason behind the bleeding that is being masked in the clever words in Don Stewart's [Oct.17] email."

It appears to me that Sun's early sharing of a little company detail may have been, on balance, counterproductive in its effect on its Canadian sales force if not its staff generally. What explanation was offered at that time raised more questions than it answered. Sun can ill afford to have the people in the most reliable of its operations suspicious not only of facts but senior management's motives.

Among the five business segments of Sun's worldwide operation (Canada, U.S., MFS -- its American mutual fund business, Asia and Corporate) three had Q3 net income with a very modest $11 million for Canada -- but still a plus; the U.S. operation continued to be a profit drain with a loss of $569 million.

Sun Life's Sept.30 year-to-date results demonstrate yet again the importance to Sun's total results of its Canadian operation: in the first 3 quarters of the year the Canadian operation had net income of $483 million while its total operating results show a loss of $325 million.

Since Kevin Dougherty's Jan. 2010 return as president of the Sun Life Canadian operation (welcomed by most Canadian agents and staff) some progress has been made in getting a bit of 'extra' money 'invested' in agency distribution which is a key to continuing and increasing profits from this most reliable and consistently profitable part of the Sun empire (Q3 individual life and health insurance sales in Canada were up 9%).

But corporate 'investment' in the Canadian operation's key career agency distribution system has been, by comparison with the corporate treasure being sucked up by activity outside Canada, virtually invisible.

As for Sun's forecast 4th quarter negative result (involving an expected one time hit to net income of $550-$650 million), it strikes me as being consistent with Sun's longtime approach to financial safety. Sun says it is going to amend the valuation of its variable annuity and seg fund business in order to "provide for the estimated future lifetime hedging costs of those contracts in our liabilities."

One of the things Sun Life corporate management needs to do is a much better job of communicating clearly and fully with its own people, especially in Canada. Otherwise they can expect their credibility to decline further in the medium to longer term.

To paraphrase Sir Lewis Namier for the benefit of Sun Life corporate management: don't swallow nails and shit screws so that Sun's Canadian agents and staff aren't forced to parse every sentence coming from the white tower in Toronto searching for the real meaning, having to examine management's words as if they were tea leaves.

by Alastair Rickard




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