Thursday, January 10, 2013

(No.225) Sun Life: dumping a can of worms

"Sun Life Financial dumps a can of American worms --
another smart move"

by Alastair Rickard

Since the release of Sun Life Financial's 3rd quarter 2012 financial results the company announced on Dec. 17 the sale for (U.S.)$1.35 billion of its American subsidiary's annuity business and "certain life insurance business". In other words this transaction carries forward the earlier decision by Dean Connor, since becoming CEO of Sun Life Financial, to take Sun Life out of the American individual insurance and annuity business. As Connor put it:  the company will thereby reduce its "risk profile and earnings volatility".

This is another of Connor's smart moves since becoming Sun CEO. For reasons I won't enumerate here the individual life insurance and annuity business in the U.S. became over time a can of financial worms for Sun Life -- and more like a barrel of maggots for Manulife, but that's another story.

As a former executive of Sun Life of Canada (following its 2002 takeover of Clarica Life, the recently demutualized Mutual Life of Canada) I follow the operations of Sun Life with more than casual interest as do the Sun Life people who stay in touch with me. Against the more recent background provided by the American sale it is worth looking at several details of Sun's 3rd quarter results.

Sun's Canadian operations, so greatly enlarged and enhanced by the acquisition of the demutualized Mutual Life and its industry leading career agency distribution system, continue to be the leading profit engine among its world-wide activities.

For example, comparing Q3 2012 results using common shareholders' net income, behold (yet again) the significance to profits of the company's Canadian operations compared to Sun's extra-Canadian activities (in Can.$):

Canada -- $237 million

U.S. -- $18 million

MFS Investment Mgt
(Sun's U.S. mutual
fund operation) --  $46 million

Asia --   $35 million

Corporate (includes U.K.
& reinsurance runoff) -- $47 million

In terms of Sun's 3rd qtr 2012 Canadian results insurance sales by its career agency sales force increased 32% over Q3 2011. In part this reflected the sale by the CSF career agents of a significant but not overwhelming volume of participating whole life insurance, a recently reintroduced individual life insurance product that many agents had long wanted in their product portfolios. Therein lies an interesting story.

When the big Canadian mutual life insurance companies (Mutual, Sun, Manu and Canada) demutualized at the turn of the century their managements and boards couldn't wait to stop selling par business. Why?

Because as stock life insurance companies operating under the federal regulatory regime with shareholders as well as their own pocket books to please, the last thing company boards and senior managers wanted was to sell a form of life insurance (participating) the share in the flow of profits from which to shareholders was restricted.

None of the these four except Mutual Life of Canada ( virtually all of whose policies, even Universal Life, were designated par) had ever been enthusiastic sellers of par life insurance (or been interested in mutuality for that matter) but the grovelling, self-serving haste with which all of them ditched the selling of par policies bordered on the indecent. Still, shareholders post-demutualization were the priority; the par policyholders certainly were not.

As the individual life insurance market waxed and waned over time many agents of long experience complained about the absence of par whole life as a desirable product. It took years for senior company managements to recognize reality and rediscover what had once been a core individual life insurance product. They will tell you that what reappeared was not as attractive as what they formally had but it is something.

Ironically London Life, always a stock life insurance company with a career sales force oriented since Adam was a boy to the sale of par life, never stopped selling par life even after the Jeffrey family gave up control. God knows that successive London Life owners and their senior executives did their best (in the financial interests of principal shareholders) to de-emphasize if not eliminate par life sales -- unsuccessfully. I recall London running non-par annuity sales contests as year end approached trying to boost the volume of non-par business from which the shareholders could be allocated 100% of the profits.

Following the sale in 2008 of Sun's 37% ownership interest in the mutual fund firm CI Investments to the Bank of Nova Scotia (an interest Sun had originally acquired by trading its own mutual fund operation plus Mutual/Clarica's larger one to CI) Sun's Canadian leadership headed by President Kevin Dougherty was finally and belatedly able to begin to think seriously about how Sun Life might actually benefit from getting mutual fund business from Sun's own career agents (who sell much mutual fund business), and (eventually) to get them to sell at least some of the funds later made available through Sun  Life Global Investments (SLGI). This has been a hard slog. In Q3 only 14% of Sun's own career agency force's mutual fund sales went to SLGI.

The challenge for Sun Canada is that for years ( having consistently ignored the warnings and concerns of some of Sun's senior career agency people) Sun senior management gave CI preferred access to the Mutual/Clarica/Sun sales force and did so for far too small a longer term benefit to Sun Canada. Moreover CI was hostile to any suggestion that it ought to put anything in the way of investment into the Sun career agency distribution system on which it came to depend for much of its quality, non-churned mutual fund business.

CI used this preferred access to Sun's large, national career agency system access very effectively and over time built relationships with many Sun agents who were or became successful in the selling of mutual funds. This was based on attractive funds and various types of marketing support. This success also cost Sun much in the way of higher margin life sales activity foregone by agents whose diversion increasingly to mutual funds was encouraged and supported by CI.

To understand how these important sales relationships between Sun agents and CI were built and the resulting Sun agent loyalty sustained I suggest reading the response to a column of mine from a CI-supporting Sun Life career agent who is very successful in the mutual fund business (see, column No.154 posted May 30, 2011).

Direction of  Sun Life's Asian operations was finally and also belatedly placed in Feb. 2012 in the hands of a real insurance man: Kevin Strain, a senior executive in Sun's Canadian operation. Strain, not a friend of mine but someone I have known since he came to Mutual Life from London Life, was -- as I have written elsewhere (, No.189 posted March 5, 2012) an inspired choice for this role by CEO Dean Connor. Sun has long needed someone with experience in and understanding of the real world of the insurance business to try to make more out of Sun's investments in Asia.

Connor's predecessor as Sun Life CEO, Donald Stewart, retired at the end of Nov. 2011. However I am interested that Stewart, with whom as CEO Strain for a time had a direct working relationship following the Sun takeover of Mutual/Clarica, continues to be involved (after a fashion) with Sun's Asian operation, particularly its minority ownership interests in Birla Sun Life (India) and Sun Life Everbright (China).

Sun Life generally and Kevin Strain in particular are likely to benefit over time from Stewart's interest and analysis. Stewart has long been committed enthusiastically to the potential in Asia for Sun Life. As I have written before, I like and respect Don Stewart more than most of the life insurance company CEOs I have known (and known about) over the years. However I disagreed with him on some matters.

For example: in repeatedly painting in countless company meetings large and small a giant and rosy picture of an Asian future for Sun he downplayed the importance to Sun's profitability of the Canadian goose that continued to lay by far the biggest share of its golden eggs and reinforced the senior management tendency to ignore or refuse to recognize the need for the company to invest [non-operating budget] dollars in enhancing a core strength -- the career agency sales force. Dean Connor seems to have moved to restore a more balanced recognition of the importance of Sun's Canadian operation in the larger Sun scheme of things. Kevin Dougherty's leadership of the Canadian operation reinforces this positive change.

Don Stewart also tended not to draw sufficient distinctions among agents operating for Sun in various countries. An agent was an agent was an agent in Stewart's Sun world, whether in India or China or Canada. This was and is a view not anchored in agency reality.

It is a fundamental misunderstanding to equate a typical Sun career agent in Canada, one engaged full time in the sale and service of life and health insurance, mutual funds and annuities with, say, an agent of Birla Sun Life who operates part-time selling what amounts to low margin, single premium GICs masquerading as life insurance and doing so while engaged in other activities and products (e.g., selling phone cards among other things).

One consequence among many is not only an agent retention rate that is risible but a distribution system incompatible with modern career agency principles and results. As major Canadian career agency companies (led by the Mutual Life of Canada) recognized a half century ago and more this approach to distribution requires reformation.

One of the many challenges Kevin Strain faces is to try somehow to reorient some agents and some markets to the sale and purchase of higher margin, annual premium life insurance products. To make money you need appropriate product margins and pricing combined with effective distribution. The relationship is symbiotic, q.v., the history of the agency system and life insurance. Still, having (I assume) Don Stewart available as a counsellor, however informally, can be an asset to Strain in his Asian role.

Another important point to note is that Sun Life Financial now led by Dean Connor is making smart moves solidly grounded in the intelligent conduct of the insurance business. Surely this is obvious (you may say) as a basis for the management of a life insurance company. It should be but in my experience it is far from certain.

Sun's activity has long been analyzed along with Manulife's by certain external 'experts' who have an imperfect understanding of the life insurance business. Expert commentary has tended to be issued comprehensively, like the rain falling on the just and the unjust. The reality is that Manulife's share price continues to languish (as indeed it should) while, as I write this, Sun Life Financial's approaches $28, distinctly higher than the level forecast by 'experts' not long ago.

My view is that there will likely be more smart steps taken. There need to be in order to help offset poor decisions of the past involving Sun's U.S. operation and elsewhere.




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