Sunday, February 9, 2014

(No.257) "Some reflections on 'what if?' history & an insurance business odyssey"

"Rickard of RickardsRead offers a few reflections on his odyssey  
in the life insurance business and its intersectiion with the 'what if?' school of history"

by Alastair Rickard

In my experience academic historians don't care all that much for what has been called the 'what if?' school of history. For example, what would have happened if Abraham Lincoln or John F. Kennedy or Archduke Franz Ferdinand had not been assassinated? Or if Hitler had not invaded Russia in June of 1941 or if either of the Quebec separatist referenda had succeeded?

While historical hypotheses based on 'what if?' speculation are unprovable, they can have an interesting relevance. Case in point: in 1931 two pedestrians were knocked down in the street by cars. Either or both could easily have been killed. One, visiting New York was Winston Churchill; the other, in Munich, was Adolph Hitler.

Years of studying history helped me gain some understanding of the importance of learning from the past as well as informing my understanding of the present and occasionally encouraging some personal 'what if?' speculation.

In terms of my education in the reality of the life insurance business, at root a business dependent upon 'selling stuff', the most valuable part came early on working in the field as a salaried financial planner with Mutual Life of Canada career agents and their clients. Indeed it was this formative experience which both created and propelled the growth of my unlikely interest in the business. I use the word "unlikely" deliberately.

As for the 'what if?' school and my personal history:  I well remember during drinks following my successful defence of the thesis for my second graduate degree (an event that occurred after I had joined Mutual Life) a couple of my erstwhile professors made clear to me that they thought I had lost my ability to make good judgements. For them the ultimate evidence of this was my having declined a Canada Council fellowship I had won (and had deferred taking up), thereby stepping off the path to a professorship in favour of pursuing my then budding interest in the life insurance business. I was not deterred by their scepticism.

Within a few years I had reason to reflect on the quality of my judgement compared with that of this duo who had shared their opinion with me over sherry that afternoon:  one ended up in prison while the other was murdered by a stranger he invited to his Mexican hotel room. 

The company I had joined from grad school, the Mutual Life of Canada founded 1868, was the first and the only significant Canadian mutual life insurance company founded as a mutual. The other big Canadian companies in this category (Sun, Manufacturers, Canada, Confederation) had all been stock companies that mutualized in the late 1950s and early 1960s as a means of avoiding foreign takeover.

For the life insurance companies it was an optional solution to their problem devised by then federal Supt. of Insurance K.R. MacGregor. He told me years later that the CEOs of a number of larger Canadian stock life insurance companies came to Ottawa begging for help to avoid the possibility of foreign, mainly U.S., takeover.

Later on he was invited to become the CEO of Mutual Life and accepted; he said it was the only Canadian life insurance company for which, becasue of its high standards, he would ever have agreed to become CEO. MacGregor was as fine a gentleman as I ever knew in the life insurance business and I have been fortunate enough to have known quite a few in Canada and the U.S.

By the time I joined the business these 'stock company mutuals' were chafing at the organizational restrictions imposed by mutuality, an approach to the life insurance business and to policyholder ownership and benefit in which their senior managements (it seemed clear to me, then and now) did not believe and to which they paid no more than lip service in any case -- and precious little of that. Only in Mutual Life had a fairly significant tradition and belief in and practise of mutuality survived down the years -- although it declined sharply latterly.

The tolling of the final bell for a fine, historic Canadian company, one owned by its participating policyholders in Canada, began on Dec.8,1997 when Mutual Life's senior management and board announced that the company would demutualize. It became a stock company renamed Clarica Life, a dumb name and one that was short-lived. 

The tolling of the bell concluded on Dec.17, 2001 with the announcement of the purchase of Clarica Life by Sun Life (also demutualized). However the disappearance of Mutual Life (like Canada Life) was inevitable once demutualization had occurred and Ottawa's short term post-demutualization protection from takeover applicable to these two new stock companies had expired.

Neither Mutual Life nor Canada Life was the beneficiary of the sort of ongoing protection provided by required widely held status (which would have precluded any post-demutualization takeover), status enjoyed then and since by both Sun and Manulife. Why? The senior managements of Mutual Life and Canada Life did not ask for protection because they did not want it. 

The fact that only half of the quartet of big demutualized Canadian companies (Confederation Life having become insolvent) had protection of their independent status going forward is something for which the senior managements of Mutual Life and Canada Life, so eager to have their mutual companies become stock companies available for takeover, can share as much blame (more in my view)-- or credit, depending on one's point of view -- as can the federal government of the day.

Since these demutualizations of big Canadian life insurance companies more than a decade ago the interests of millions of par policyholders have run a distinct second to those of the companies' shareholders. Demutualization, perhaps most sadly for the Mutual Life of Canada, was both unnecessary and mistaken and not in the longer term interests of its par policyholder owners.

The same could also be said about a number of the other former mutual life insurance companies including in the U.S. On the flip side of that American coin are some larger mutual companies like New York Life and Northwestern Mutual which wisely remained as mutuals.

Those who argue that Canadian life insurance company growth -- especially via takeovers -- required demutualization and the raising of capital through a share structure are always happy to ignore inconvenient facts. For example: Mutual Life bought the Canadian operations of both Prudential Assurance and Metropolitan Life before it became a stock company.

In 1997 Canadian insurance legislation had been changed permitting mutual life insurance companies to issue voting shares which could not exceed a minority interest. This option was never used. In companies whose boards and senior managements were determined to demutualize, there was no interest in devices and approaches that would provide reasons not to demutualize thus negating the misleading message in their public song and dance about the need to demutualize in order to be able to access capital.

[The actual story behind regulatory and company aspects of Canadian life insurance company demutualization has not been told on the record. will attempt to fill in a few of the blanks in a future column.]

Nor should one forget that mutual company structure simply did not hold out the prospect of the sort of inflated levels and forms of executives' financial reward so readily available after a mutual becomes a stock company. Indeed as a key factor in propelling demutualization it should never be discounted.

Some of us who were associated with the Mutual Life of Canada will continue to remember job satisfaction derived from serving the company's par policyholder owners' best interests. It was a perspective that did not come from a quarterly results fixation.

It did not spring from decisions aimed at winning smiles of approval from institutional investors, financial media, rating agency analysts and various toads in the life insurance garden, nor from the priority routinely accorded in recent years to the financial aggrandizement of a financial services company's senior management group and board of directors [q.v., the pattern since ca. 2000 in senior executive compensation in the demualized companies].

During my years with Mutual Life, and entirely separate from my employment, I started in 1978 as a spare time activity -- and as what I thought of as my modest contribution to the Canadian life insurance industry's mental health -- the Canadian Journal of Life Insurance. It was a magazine that accepted no advertising and set out to publish material and opinions and focus on issues that trade magazines (dependent as they are on industry advertising) customarily choose to avoid.

Since CJLI was a spare time avocation of mine, and as the years passed more and more of that spare time was devoted by me to my employment, it was the Journal which eventually had to be put on the shelf after more than a decade.

Mutual Life's senior management had been most unhappy when (without consulting them) I started CJLI but I kept my job although I was told by the CEO that it was "hanging by a thread". It turned out to be a thread with rather remarkable tensile strength, one that did not break under the pressure of further threats of job termination or periodic threats of libel actions by several life company CEOs (among others who were particularly unhappy with what appeared in the pages of CJLI).

Nor did my departure from the company occur even when Sun Life bought Clarica although Sun had been a company I had criticized extensively in CJLI.

I was on several counts an unlikely corporate survivor throughout my odyssey in the life insurance industry. Indeed had anyone asked me in, say, 1980 how likely it was that I would ever find myself not only an employee of Sun Life but a survivor of its takeover of Mutual/Clarica, I would have put the odds of both events happening about the same as Don Cherry being chosen the national leader of the New Democratic Party.

After years as both an executive and (in my spare time) an editor, writer and industry critic, including latterly during my time with Sun Life, I did reach a point finally where I felt I had likely said or written, both to company management and publicly, everything I wanted to say about the business -- at least twice.

Some years prior ro my actual departure from Sun Life it had become as plain as a pikestaff to me that the time was approaching to remove myself.

It was time to put some distance between me and the tiresome combination of industry hypocrisy and executive cant, to separate my day-to-day existence from the industry's love affair with its brands of 'New Coke', from much of its current approach to the life insurance business including its ritual quarterly genuflection before investors under-informed about the business and from its handling and (mainly) mishandling of the various forms of agency distribution.
And so I departed.




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