Tuesday, September 30, 2014

(No.273) "Manulife's purchase of Standard Life of Canada: sensible or not?"

"Manulife buys Standard Life's Canadian operation:
some comments about obsequious insincerity and other matters"

by Alastair Rickard

I have written a number of RickardsRead.com columns with Manufacturers Life (Manulife), the Toronto-based Canadian life insurance company, as a subject. Going further back I wrote a good deal more about Manulife in issues of my Canadian Journal of Life Insurance [CJLI].

Therefore I was not surprised to receive a couple of requests to share my views about the purchase for $4 billion by Manulife of the Canadian subsidiary of Standard Life of Edinburgh. a transaction to be completed early in 2015.

I have never stood among those members of the media or life insurance industry who would cheer the supposed superior activity while ignoring the deficiencies of Manulife and its senior management. As editor of CJLI I once gave the then CEO of Manulife the Sir Mackenzie Bowell Award. It was an award I created specifically to recognize an absence of excellence by someone in the Canadian life insurance industry. I named it so because Bowell (an Orangeman from Belleville Ontario) is arguably the least distinguished prime minister (1894-96) in Canada's history.

Had I still been bestowing the award post-2008 when Manulife ended up in a financial ditch I would almost certainly have given it to the company's then CEO Dominic D'Alessandro.

As for Standard Life's Canadian operation long based in Montreal I formerly had a somewhat higher regard for it than I have in more recent years.

Standard, a mutual company long based in Scotland, had successfully resisted in 2000 and in 2003 attempts by two different carpet-baggers to force its demutualization. However that changed in 2006 when Standard in Edinburgh finally succumbed -- as the result of altered financial regulatory requirements combined with poor management and inferior performance -- to pressure to change from a mutual to a stock company.

The Canadian operation of Standard Life had already been changed by Edinburgh from a branch operation to a subsidiary. Even before that Edinburgh had tried unsuccessfully to 'patriate' a big chunk of the Canadian branch's surplus.

Standard's Canadian operation had much to recommend it at one time including some quality people in management. Also I confess to having a soft spot for Standard Life's Canadian operation if only because the real starting point of the life insurance business in Canada can be dated from the appointment by Standard Life in the 1830s of an agent in Quebec City.

Not so long ago Standard's Canadian operation gave up competing even for its declining share of the individual life insurance business in this country. Here Standard had long operated a career agency distribution system, then gave it up (like many other life companies) in favour of chasing individual life sales via brokerage. That was thought to require the offering of products carrying certain features with high up front commissions.

There was a significant distribution-related life insurance policy fraud on companies some years ago  in Ontario, the investigation of which (dubbed Operation Lion as I recall) reached a certain point and was quietly shelved in order -- as far as I could determine at the time -- to avoid public embarrassment of both regulators and certain life insurance companies taken in by some unscrupulous sales people. They had taken advantage of policy designs and compensation ready made by companies to be taken advantage of.

Because of Standard's then product and high early commission system designed to attract brokerage sales, it was a company that would certainly have stood out as a leading example of victimization had there been any any real media coverage of Operation Lion.

In the modern era Standard's Canadian operation has long been more successful as an asset product/pensions/group player than as a player in the individual insurance business. Therefore, insofar as Manulife is seeking to bulk up its individual life business in Canada, the addition of Standard's Canadian subsidiary won't do much except for the addition of what's left of its declining block of in force individual life insurance policies.

Leaving to one side the price to be paid for the Standard business here it does make sense for Manulife to add substance to its operation in Canada (and especially in Quebec) where, given intelligent product pricing and distribution -- and in Manu's case that is hardly a given --  the company can add some real profits to supplement its excessive focus on chasing 'pie in the sky by and by' profits outside Canada.

For an excellent recent example of the potential financial benefit to a Canadian life insurance company's bottom line from an appropriate acquisition in Canada one need look no further than the reliably significant proportion of Sun Life's annual worldwide profits arising from its Canadian operation after it acquired Mutual Life/Clarica Life's Canadian operation in 2002 with its leading, national career agency system, an effective national distribution system for both insurance and asset products.

As both an industry 'insider' as well as an editorial critic of the life insurance business I have long been sceptical about the actual basis and degree of substance behind certain of the revenue/profit numbers from the foreign operations (especially in Asia) of North American life insurance companies. There is nothing quite so malleable as the actual and especially projected numbers involving product pricing and distribution and retention in some foreign markets put out by some life companies.

One example: I remember one senior Manulife executive confiding to me what a real mess a particular Asian operation of the company was while what I could read regularly in the financial press (as their 'reporting') was the Manulife spin of how great things were in that very operation. And of course there is always the possibility in a company's numbers of the inflation of profit figures through unrealistic product pricing, distribution costs and other self-serving assumptions. Of course some in a company's senior management inevitably respond that a life company's actuaries are entitled to make assumptions. Rather weak tea.

While the Manulife attempt to bulk up in Canada makes sense, the $4 billion price it is paying for Standard's Canadian operation seems excessive to me. In terms of real value going forward in the Canadian market there is no comparison with what Sun Life obtained to boost its market presence in Canada from its purchase of Clarica Life (the demutualized Mutual Life of Canada) in terms of size, quantity, quality, diversity, market position in every province and most significantly a very large national proprietary distribution system.

Of course there is precedent provided by Manulife itself for paying too much for an acquisition. Manu received the sort of uncritical media attention to which it became accustomed prior to its entry into the financial ditch ca 2008 when it bought John Hancock Life for $10.3 billion in stock in 2003. Hancock, formerly a mutual company, had demutualized in 2000.

At the time Manulife bought John Hancock I was far from being an industry loner in my view that Manulife overpaid for John Hancock. Indeed when Manulife bought the 141 year old Boston-based company there was a view held by more than a few within the industry that Manu had bought a company in decline.

Nor was I alone in being amused by Manu going round to American state insurance regulators within a a comparatively short period of time pleading its case for a 40% average raise in the premiums on its (i.e., Hancock's) in force Long Term Care policies (in some cases a 90% increase ws needed). The sale of LTC business was something Hancock pursued with the sort of vigour, poor judgement and questionable basis that Manulife itself later did involving the promotion and sale of that oxymoronic product: the guaranteed variable annuity.

It wasn't all that long before Hancock's enthusiastic leap into the LTC market was shown to be (to those who actually wanted to take notice) less than fortunate: its group LTC premiums had been increased by 25% in 2009, having already jumped 14% the previous year. For a sense of the magnitude of the Hancock LTC mess (amongst other facets of Hancock's operation) for which Manu had overpaid not long before the U.S. LTC market, pricing and claims really tanked, consider that by 2010 Hancock had 1.2 million LTC customers with seriously underpriced coverage and had already paid out more than $3 billion in LTC claims on just a small fraction of the coverage it had sold.

Boys and girls: can you write a sentence including the words "have you done your due diligence"?

One of the problems with much of the 'expert' analysis of life insurance companies and their operations is the often inadequate understanding of the realities of the business, including the failure to understand the importance to a company's mix of new and in force individual business of product design, pricing and distribution. Let me repeat for the umpteenth time in a RickardsRead column: active life insurance companies are in the business of selling stuff.

Manulife provides a case in point. Before Manu hit the financial ditch following the 2008 financial meltdown in the U.S. you would rarely see anything in the media or from 'experts' about Manulife that wasn't favourable. More often than not so-called analysis was laudatory, even after Manu stopped in 2004 hedging the huge risk associated with its sales tsunami of variable policies.

What is the real story behind Manulife's financial crisis?

The root cause was not the Wall Street-related financial meltdown. It was not even the fact that Manulife ceased hedging its variable annuity risk in order to increase company profits and hence senior management's already excessive compensation.

The Manulife financial problem's root cause was the absolute stupidity of senior management in proceeding to sell truckloads of variable rate product with contractually guaranteed rates of return (and moreover highly unrealistic rates over the longer terms involved in these policies). Many people experienced in the business and not willfully blinded by visions of corporate executives' sugar plums or easy commissions knew this and acknowledged the risks -- at least  among themselves.

After the financial heifer dust hit the fan at Manulife it did not take long for the company's top management to go crying to Ottawa begging for regulatory relief to help provide a bit of traction with which to try to extricate the company from a financial mess of its own making. Manu's senior management got substantially less assistance than was wanted -- and rightly so.

This sort of corporate tale is only one example out of many of misguided management in financial services. The careers of too many CEOs contain far more financial compensation than achievement.

In my experience and observation some of the lousiest decisions made in the financial services business have been prompted by a couple of tendencies. Warren Buffet has remarked on one of them: people in the financial community would rather be wrong as a group than right on their own. This feeds the other tendency.

Career management considerations by executives are too often the first priority when offering opinion within the councils of a company. Indeed for too many executives the best personal tool to be relied upon is obsequious insincerity. It has certainly assisted some would be CEOs to clamber up the greasy pole.

Executive rank has been shown again and again to be no prophylactic against the allure of bad ideas. While every senior executive in a life insurance company has the right to be mediocre even stupid some have certainly abused the privilege.


email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

previous columns & blog archive:
to access columns and this blog's archive, the links to which
are listed chronologically in the margin beside each column
as it appears on the RickardsRead.com website, go to
a recent column and use the links

to set a 'Google Alert' for RickardsRead columns
in order to receive automatic notice of new columns
as they are posted to RickardsRead, go to


Saturday, September 6, 2014

(No.272) "Reading Off The Beaten Path: Alistair MacLeod, Daniel Woodrell & others "

"Reading Off The Beaten Path: novels by 
Alistair Macleod, Daniel Woodrell and others "

by Alastair Rickard

Many of the novels I have reviewed in RickardsRead columns have been commercially successful although not 'bestsellers'. However all have been books I enjoyed reading, some consumed as readily  and with as much lasting nourishment as cotton candy at a fall fair, others savoured over time like a bottle of good wine.

Recently I have been spending some time reading (or rereading) several novels that have never made it to bestseller lists. They are off the literary beaten path and all the more deserving of attention because of that.

While the tastes in fiction of followers of RickardsRead will not necessarily or in some instances even probably match mine, those who in the past have liked novels I have recommended may enjoy reading those listed below. All are still in print.

1. "Out" by Natsuo Kirino translated by Stephen Snyder (originally published 1997; English translation first published 2003; Vintage).

Natsuo Kirino has been published in North America as a writer of crime fiction -- and she is, in part. But "Out" is more than a crime novel involving several lower middle class Japanese women who work together  on a night shift packaging lunches. The novel is also an ode to a rather depressing way of life, to the economic and social plight of many women in today's Japan.

In this story these women get caught up in a grisly crime and its unexpected aftermath. The novel is not easy reading but it has real substance.

2. "Banished Children of Eve" by Peter Quinn. (Originally published in 1994, Penguin).

As one whose university education involved historiography I enjoy an historical novel the period of which interests me, that has a realistic and interesting plot and the 'history' the story calls upon is referenced accurately. I have no time to waste on historical novels that can't meet those criteria but too many of what are presented as such these days do not. "Banished Children of Eve" meets and exceeds these criteria.

Set mainly in New York City during the 1840s to 1860s it delivers a very effective portrait of the city and in particular the living conditions of its residents as the city received -- but did a lousy job of absorbing -- a flood of Irish immigrants after the various rounds of the potato famine drove Irish emigration to New York and Boston.

Peter Quinn, an Irish-American, tells the story through Irish and Irish-American characters' intersecting plot lines culminating in the American Civil War's effects on the economy and the lives of New Yorkers rich and poor. The climax of the novel involves the 1863 "draft riots" in the city which saw not only civil unrest and destruction of property but loss of life and serious confrontation between the Irish immigrants and blacks whom the former blamed for loss of jobs and declining wages.

This is an absorbing historical novel.

3. "No Great Mischief" by Alistair MacLeod (McClelland & Stewart, 1999).

Alistair MacLeod, the Canadian writer and teacher, was known best for his short stories. Rex Murphy called them "miniature masterpieces". His career as a superb wordsmith made him a bright light in the Canadian literary firmament.

Macleod, who died in April of this year, wrote only one novel: the award winning "No Great Mischief". Its focus was on the tightly knit families who came to Cape Breton from Scotland in the 18th century and then on a particular family in the later 20th century directly descended from them.

The story is told mainly through the voice of one modern character, Alexander MacDonald, who carries the narrative of the lives of various family members. MacLeod's own Cape Breton experience and heritage clearly informs the narrative.

The novel has an uncanny resonance particularly for Canadians of Anglo-Scots/Nova Scotian background and indeed for those who share aspects of this Canadian picture.

A personal example: I ended up working as a labourer in a mine/refinery in Thompson Manitoba in the 1960s before one could drive in and while it was still mainly a rough  and tumble mining camp with many strange characters among its denizens. When I read MacLeod's account of Alexander MacDonald surviving in a similar setting and time frame in northern Ontario I was impressed by its verisimilitude and by the memories his narrative called up for me.

There is not a false or contrived note or poorly constructed sentence in "No Great Mischief". It is writing at its most accomplished.

4. "The Maid's Version" by Daniel Woodrell (Little Brown, 2013).

Daniel Woodrell is a novelist whose talent far exceeds his public profile in the U.S. I have written in these columns about him and his skill at writing, especially about people who, like him, lived in Missouri and the Ozarks. For me his three novels set in Louisiana now republished as the "Bayou Trilogy" rank for reading pleasure alongside the first three of Philip Kerr's Bernie Gunther novels later issued in a single volume under the title "Berlin Noir".

Woodrell's latest novel, "The Maid's Version", is set in a Missouri town called West Table during the early decades of the 20th century. Its central characters are Alma DeGeer Dunaheu, a dirt poor day worker in the homes of the local wealthy and various members of her family. Central to the novel are the economic class system and the links to an an earlier town 'disaster', supposedly an accident claiming dozens of lives.

The Irish novelist Roddy Doyle has called Daniel Woodrell "one of the world's great novelists". I share his opinion.

5. "Cold Winter In Bordeaux" by Alan Massie (Quartet 2014).  

Alan Massie is a Scottish journalist and novelist with more than 20 novels published. One of my favourite novelists Robert Harris called the first of the Bordeaux quartet ("Death in Bordeaux"} "both a thriller and a literary novel: a difficult trick but in my book the greatest to bring off".

The second in the series is "Dark Summer In Bordeaux" and with the publication of "Cold Winter In Bordeaux" Massie is three quarters of the way through the writing of a quartet of novels set in the French city of Bordeaux during the Second World War and the city's occupation by the German military.

This third novel is set during 1942-1943 and is, on one level, a murder mystery to be solved (with the Germans looking carefully over his shoulder) by the city's lead homicide detective Superintendent Lannes. He co-operates with the German occupiers no more than he is forced to do by circumstances but they are always looking out for any persons or acts they regard as relevant to their occupation or Nazi ideology.

But the novels are as much the chronicle of the Lannes family's challenges and tribulations during the war and Supt. Lannes' reaction to them. For example one son ends up working for the Vichy government while the other leaves the country and becomes a member of the French Resistance while the daughter falls in love with a young but politically naive Frenchman who has embraced the German war effort.

Lannes himself wrestles with trying to protect his family from the negative forces at play in the city and in France while doing what he can to assist Jewish or homosexual acquaintances who are trying to avoid the attentions of the Gestapo. All the while he must officially report to superiors appointed by the German occupiers.

To appreciate fully the quality of Massie's writing in these novels one should read them in the order they were written. They are as much one long narrative as three separate novels.



email: Alastair.Rickard@sympatico.ca

blog: www.RickardsRead.com

previous columns & blog archive:
to access columns and this blog's archive, the links to which
are listed chronologically in the margin beside each column
as it appears on the RickardsRead.com website, go to
a recent column and use the links

to set a "Google Alert" for RickardsRead columns
in order to receive automatic notice of new columns
as they are posted to RickardsRead, go to