Monday, March 5, 2012

(No.189) Sun Life Financial: some comments

"Sun Life Financial update:
smart moves, gormless prats & loblolly boys"

by Alastair Rickard

On Feb. 29, 2012 major financial media, like the (Toronto) Globe and Mail's Report On Business, ignored the previous day's announcement of a significant change initiated by the new Sun Life CEO Dean Connor. He replaced the head of Sun's Asian operation by reaching into the second level of the senior ranks of Sun's Canadian operation for a new president of Sun LIfe Asia: Kevin Strain.

As background to the Strain appointment one needs to understand that the role Kevin Strain has filled at Sun Life Canada for several years (Senior V-P, Insurance and Investments) had been filled prior to his appointment to it by a Sun Life executive from its U.S. operation. [Clarica Life, the demutualized Mutual Life of Canada, had been taken over by Sun soon after the federal rules allowed.]

He had been imported (unwisely in my view) by Sun Corporate to replace Mutual/Clarica's Barry Triller, an actuary but a very experienced and savvy senior executive into whose DNA had seeped a fundamental understanding of distribution and agents and the core reality that we were in the business of 'selling stuff'. Triller had the loyalty and trust of the Mutual/Clarica (now Sun Life) career sales force but was pushed out of Sun Life as part of the inevitable purge in the post-acquisition/integration period of most senior Mutual/Clarica executives.

[In the interests of clarity: I became for a few years an executive in Sun Life's Canadian operation by virtue of the Mutual/Clarica takeover by Sun. I was not shown the door by Sun but I did decide to leave after a few years, having said everything I wanted to say to senior management -- at least twice.]

Triller's American replacement, whose conduct I observed at close range, knew very little about Canada and in my opinion almost nothing worth knowing about career agency distribution, i.e., about the system the Mutual/Clarica version of which Sun had paid hugely for. His U.S. life insurance industry background and clear preference was 'brokerage' distribution. His unsupportive attitude to career agency distribution and his negative decisions affecting this major new Sun Life asset in Canada soon became evident to the career agents (then as now the principal engine of Sun individual sales activity and profitability in contrast to its continuing brokerage operation in Canada).

The Mutual/Clarica/Sun Life career agency system became demoralized and pinched of support and came perilously close to being run into the distribution ditch -- as indeed Sun had managed to do gradually in the 1990s with its own Canadian career agency distribution system. To paraphrase T.S. Eliot: Strain's predecessor had a mind so fine that no valid idea involving Canadian career agency distribution could violate it.

After far too long a period had elapsed of enduring this sort of senior 'leadership' Kevin Strain was appointed to the role to help rehabilitate a distribution system approaching dysfunction. He worked with (among others) Jack Garramone, the head of the former Clarica now Sun Life career system, a very smart and experienced agency executive who had come over to Mutual/Clarica after it had acquired Met Life's Canadian operation.

Another key player was longtime Sun executive Vicken Kazazian who had a reputation as a problem solver and who, while not involved previously with direct agency responsibilities, had an understanding of and empathy for the career agency system -- unlike some of his 'original Sun' peers [see footnote 1 at the end of this column].

Strain apparently impressed Dean Connor during the latter's brief stint as president of Sun's Canadian operation ( in his role Strain reported to the Canadian president), a period which occurred between Kevin Dougherty's two terms as Sun Canada President, the second of which is ongoing. Last year, not a good one for Sun Life worldwide, Sun's Canadian individual insurance sales still increased by 9% year over year -- impressive in both a company and an industry context.

While I would not describe our relationship as much more than aquaintanceship I have known and observed Strain since he joined Mutual Life from London Life in the 1990s; they were Canada's two leading career agency life insurance companies. Although Strain is an accountant and his area had largely been in finance he, like Dougherty, demonstrated an affinity for and understanding of agency distribution and of the nature of the core of the insurance business: selling stuff.

Now, as then, I regard Strain as an able insurance man. In my experience this sets him apart from the sort of bean counters from la-la land (by definition a state of mind characterized by unrealistic expectations) one tends to encounter in a company's finance function, gangs of corporate loblolly boys best suited to little more than assisting with budgetary amputations. Much the same was true of certain gormless prats to be found at that time among those in the ranks of 'original Sun Life' executives for whom the idea of actually being in the selling business seemed somehow infra dig if not downright grotty.

I think Dean Connor's somewhat surprising choice (a bit surprising to me at least) of Kevin Strain as head of the company's Asian operation is not only interesting and indeed imaginative but may well turn out to have been inspired.

Sun Life has poured much treasure into its Asian operation, especially in recent years and particularly into the operations of the companies in India and China in which it actually has only a distinctly minority ownership interest. Former CEO Don Stewart, for whom I had and have a high regard as a person, seemed to me to be focused inordinately on Sun's future in Asia almost to the exclusion of what should also have been directed to support and enhance the company's engine of profitability (post-Clarica acquisition): its Canadian operation which de facto has supported Sun's Asian adventures [q.v., footnote 2].

Strain will need to examine closely and ride herd on Sun's 'investments' in its Asian operations. They need more and better senior management attention, all the more so at a time when its individual life sales in Asia (2011) declined by 10%. I have commented previously in RickardsRead.com columns on Sun's Asian operations and will not rehearse those comments here [q.v., footnote 3].

However I do note, for example, that the increase in Sun's net income from Asia from $92 million in 2010 to $138 million last year was supported, company management tells us, by for example "the favourable impact of changes to actuarial estimates and assumptions" (question: pricing assumptions like those that kept the Sun UL product for Canadian brokers underpriced for so long?) and also supported by "reduced levels of new business strain from lower sales in India and Hong Kong".

I will not examine in this column Sun's 2011 results although there are ample interesting points to reward one's attention. For example: the financial impact of Sun's "run-off" of that portion of its reinsurance (retrocession) business which it could not sell or for that matter even give away [q.v., footnote 4]; or the huge financial penalties Sun ultimately incurred because of its ill-advised involvement with the variable product business in the U.S. and the related and financially unfortunate acquisition for $2.6 billion (Can) in 2001 of Keyport Life of Boston, an annuity company.

I do want to touch on a couple of the strategic decisions made (without delay) by incoming Sun Life CEO Dean Connor who replaced Don Stewart on Dec. 1, 2011.

1. Connor took a wise decision to have Sun stop issuing individual insurance and variable annuity business in the U.S. The variable annuity decision may seem logical, even inevitable; the one involving insurance is less obvious. The reader needs to understand that Sun made the error some years ago of moving its U.S. individual insurance business away from a career agency distribution base to a half-baked, tax-oriented, high end market approach relying on distribution through PPGAs.

This career agency distribution system mistake was also replicated (gradually) in Sun Life Canada and came to involve 'brokerage' of one sort or another. As I discovered when I was asked to take a look at Sun's then "managed channel" in this country, Sun in Canada was -- pre-Clarica purchase -- likely still getting 3/4 of its new individual insurance business from former exclusive Sun career agents who had been cut loose. This comedy of distribution errors eventually produced for Sun Life in Canada declining sales, decreased market share and minimal to non-existent individual insurance product profitability on new sales.

In Canada this unsatisfactory distribution reality was addressed effectively by Sun with its 2000 purchase of Mutual/Clarica and its large career agency distribution system. No such opportunity offered itself in the U.S. and given the demands on Sun's financial resources these days (foreclosing the re-creation of its own American career system) Connor did the right thing and deserves credit for biting the bullet in terms of Sun's individual insurance operation in the U.S.

2. Sun's recent "strategic review" initiated by Connor repositioned Sun's corporate focus on growth in four "pillars", the first of which is "continuing to build our leadership position in Canada in insurance, wealth management and employee benefits". To which I say amen. It is about time the company properly prioritized its Canadian engine of reliable profitability.

The corporate repositioning directed by Dean Connor addresses, within Sun Life, that tendency for financial institutions to get bigger without becoming more coherent. This was well illustrated leading up to the Wall Street meltdown ca 2007-8. Neither corporate size nor lordly executive status provide prophylaxis against the embracing of bad ideas by senior management.

Dean Connor's early initiatives and decisions as Sun Life Financial's new CEO deserve attention and support. As for Donald Stewart, Connor's predecessor, he deserves the sort of public credit he earned but has not yet received from most of the financial services paparazzi for keeping Sun Life Financial out of a financial sewer approaching the depth of the one into which Manulife's senior management mindlessly jumped, a seriously misguided leap the results of which will continue to be a stench in the nostrils of that company's shareholders and policyholders [q.v., footnote 5].

Footnotes: RickardsRead.com archive sources:

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

2. "Sun Life's Canadian Jewel", column No. 138 posted Feb.22, 2011.

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

4. " Sun & Manulife: bye bye retrocession", column No. 149 posted April 28, 2011, and
" Manulife retrocession: like a dog turd in dung", column No. 161 posted July 24, 2011.

5. "Sun Life: nails & screws", column No.178 posted Nov.18, 2011, and various other columns on RickardsRead.com since Jan. 2009; for example column Nos. 177, 173 & 143.

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email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

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