Sunday, November 4, 2012

(No.218) Sun Life & Economical Insurance: updates


"Updates: one on Sun Life and the other on Economical Insurance and its ongoing distribution of heifer dust"

by Alastair Rickard


In late October Bloomberg News reported that Morgan Stanley had been retained by Sun Life Financial to solicit bids for its U.S. annuities business. While Sun Life has refused to confirm that a sale is in the works it is almost certainly the case that it is.

New Sun Life CEO Dean Connor said late in 2011 that Sun was getting out of the individual insurance and variable annuity business in the U.S. It is a wise decision for reasons I have touched upon previously.

In May 2001 Sun bought the U.S. company Keyport Life Insurance Company ( it was and is an annuity company rather than a life insurance company per se) for $2.6 billion Can. In Dec. 2001 Sun Life announced the acquisition of the large Canadian life insurance company Clarica Life (the recently demutualized Mutual Life of Canada, founded 1870) tied to an exchange of 1.5 Sun common shares for each Clarica share.

The Clarica purchase was a good one for Sun; Keyport has not turned out so well. As a key part of the Clarica deal Sun acquired Canada's largest and best career agency distribution system; individual product distribution (principally via this now proprietary sales force) is still growing as a core strength of Sun's Canadian operation.

Keyport's (then) annual variable annuity sales in the U.S. of $1.1 billion Can. jacked up Sun's exposure to variable annuity business  measured by annual sales to $7 billion Can. Before all that long the insurance industry reality turned out to be that variable annuities were not so much the key to the vault as to a financial crypt.

The timing of the Keyport acquisition by Sun was unfortunate on several levels including the American variable annuity market given what's happened in and to that market, post-2007 especially -- quite apart from whether Keyport as a company was really all that attractive. I have been told (reliably I think) that the senior management of the Sun Life U.S. operation had de facto committed the company to the purchase of Keyport before Sun Corporate in Toronto had even completed due diligence on the deal.

In terms of an analogy I would liken Sun's purchase of Keyport Life and its timing to the purchase of shares in the White Star Line while the Titanic was still under construction in Belfast.

If Sun realizes $1 billion+ for its American annuity business it will be fortunate. However a sale would certainly help Connor realize his announced corporate goal of $2 billion in annual operating income by 2015 based largely on Sun's Canadian operations -- the reliable golden goose of company profitability, certainly since the takeover of Mutual/Clarica -- as well as Sun Life's Asian operation (although its ownership interests in India and China are distinctly minority ones) plus Sun's U.S. mutual fund business MFS Investment Management.

The market appears at the moment to like Sun's direction. Sun shares closed up again on Friday at $25.22. I hasten to add the caveat that the 'market' and most of its 'experts' have an abysmally poor understanding of the reality of the life insurance business in Canada and in the overseas fields in which Canadian companies are operating. So up or down, don't assume that either the buying or selling of Sun Life shares is based on solid understanding.

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Back in June this year I agreed to an interview by journalist Kate McCaffery about the future of the Canadian life insurance business. It was for the anniversary issue of The Insurance & Investment Journal, a Canadian magazine based in Montreal and published monthly in French and English.

I understand that an article based on that lengthy interview will appear in the magazine's end-of-the-year anniversary issue ( q.v., www.Insurance-Journal.ca).

Not long after the interview I decided I might as well put down some of what I had said in a column for RickardsRead.com (q.v., "What's been wrong with the life insurance business?", column No.202, posted June 21, 2012).

After the column appeared on RickardsRead.com I was asked by The American College of Financial Services for permission to publish it as an article in their magazine The Wealth Channel. The issue of that magazine in which my article appears (Winter 2012) has now been published (q.v., www.The WealthChannel.com).

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I have devoted a number of columns posted to RickardsRead.com to:

(1) the proposed demutualization of Economical Mutual, a large Waterloo Ontario-based property & casualty insurance company, and

(2) a yet to be defined Canadian regulatory regime governing the demutualization of a federal p & c insurance company, a regime prompted by Economical's desire to demutualize.

( My most recent column (No.213) was posted on Sept.2,2012)

The whole affair has dragged on since 2010 and I see no obvious political upside for the federal Minister of Finance Jim Flaherty from the implementation of such a regime since it will inevitably result in there being some unhappy stakeholders, not least among them certain p & c company policyholders. Hence there appears to be no reason for Flaherty to want to push the process along any more quickly than he feels he must.

Still, the senior management of Economical Insurance (as its management now prefers the company, although still a mutual, to be known) recently indicated renewed confidence based, it claimed, on the fact that Flaherty had "recently reaffirmed to us that his department is following through with the development of regulations that are required to enable us to demutualize ... it is taking longer than we hoped and expected ...."

That at least is one statement from Economical's senior management that can be believed. One can wager that the comparatively small group of Economical Mutual insiders had expected to be able long since to divide the mutual p & c company's 'equity' among themselves -- either entirely or largely. I am betting that, at the very least, the intended magnitude of the screwing of the vast majority of Economical policyholders will not now be allowed.

In what looks to me like a part of a plan to enhance market interest in Economical Insurance as a stock company, 6% of the company's staff (145 people) have just been terminated. Of course management claims these firings of staff are unrelated to the planned demutualization.

That claim belongs in the same wagon full of heifer dust as the claim that the company is better off demutualizing -- the same sort of greed-related, crap argument that animated the unnecessary and undesirable demtualization of Canada's oldest and best mutual life insurance company, also Waterloo-based: The Mutual Life Assurance Company of Canada.

Stay tuned.

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email: Alastair.Rickard@sympatico.ca

blog:  www.RickardsRead.com

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