Jumping in at the deep end, Sun Life’s new CEO Dean A Connor has outlined a new strategy aimed at jolting the insurer’s earnings out of stagnation. Changes include Sun Life’s exit from the US variable annuity market and greater emphasis on driving growth in its Asian operations.
A new broom, it is said, sweeps clean. This is certainly the approach of Sun Life Financial president and CEO Dean A Connor who announced a sweeping restructuring of the Canadian insurer less than two weeks after his appointment to the positions at the start of December 2011. Connor was formerly Sun Life’s chief operating officer.
“Today begins a new chapter in the history of Sun Life Financial,” Connor proclaimed in a conference call on 12 December. “We are charting a new course with a new strategy that leverages what we do best today, and positions us for success as we pursue the many opportunities in our business around the world.”
Connor explained that the key objectives of the restructuring are to reduce financial volatility while at the same time accelerating growth and increasing the return on shareholders’ equity by shifting capital to businesses with superior growth, risk and return characteristics.
The most significant step towards reducing volatility is the decision to cease writing new variable annuity (VA) and individual life business in the US at the end of 2011.
On the decision on VA’s, Conner said: “Variable annuities carry a significantly higher capital requirement under Canadian capital rule than the US.”
He added that under Canadian accounting rules equity and bond market volatility can result in VA business in the US producing “dramatic swings in net income”.
Cessation of new VA business in the US will lead to about 800 out of about 3,000 employees in the US becoming redundant and, estimates Sun Life, will result in it incurring a one-time, pre-tax transition cost of between C$75m ($73.5m) and C$100m. In addition, C$97m of goodwill associated with the US VA business is likely to be written down.
On the decision to cease selling individual life products in the US, Connor explained that Sun Life has relied on VA distribution wholesalers to perform this function. Without this in future it would not have been viable to build a dedicated life insurance business unit to the required scale.
Connor noted that Sun Life exited the US universal life market some 18 months ago. The reason, he said, was that these products had become commoditised, were “thin on margin” and sensitive to low interest rates.
In this regard, president of Sun Life Financial US, Wes Thompson, made his similar view clear at a Citi Financial Services conference in March 2011.
“There’s no difference from term life to universal life, generally speaking,” said Thompson. “They’re both commodities. It is price-driven and the top sellers of those two products have the lowest prices.”
Concluding, he stressed: “That’s not sustainable.”
However, the cessation of Sun Life’s VA business in the US comes as a significant about-turn when compared to the view expressed by Thompson at the Citi Financial Services conference.
Referring to the huge number of American Baby Boomers reaching the retirement age of 65, Thompson stressed: “It’s so significant that we believe there is an opportunity to play in the variable annuity space.”
He added: “We feel good about where we are going.”
Thompson reiterated Sun Life’s positive view on its future in the US VA market again in September 2011 at the Scotia Capital Financials Summit.
“We want to grow this [VA] market moderately with a balanced approach,” Thompson said.
Sun Life reported VA sales in the US in the third quarter of 2011 of $847m, 90% of its total sales in the US.
Sun Life’s final decision to exit the US VA market is clearly a very recent one. If a tipping point was reached it is quite possible that it came in the wake of the insurer’s results in the third quarter of 2011.
In the quarter, Sun Life’s operating net income slumped to a loss of C$572m from a profit of C$897m in the first half of the year.
Sun Life attributed the loss in the third quarter to reserve increases of C$684m which were required because of steep declines in equity markets and interest rates reflected primarily in Sun Life’s US VA and individual life business.
Expanding on Sun Life’s growth strategy, Connor said that it will be based on four pillars, the first of which will be to build on Sun Life’s leadership position in Canada in insurance, wealth management and employee benefits.
Despite its withdrawal from the US VA and individual life business, the country remains an important part of Sun Life’s growth strategy. As the insurer’s second strategic pillar Connor explained that Sun Life’s focus in the US will be on becoming a leader in group insurance and voluntary benefits both of which, he stressed, are “less capital-intensive businesses”.
Highlighting what he sees as Sun Life’s competitive advantage in the US group life segment, Connor said: “The ability to leverage people, technology and process between our large Canadian benefits business and our US benefits business is something none of our US competitors can do.”
At the end of 2010 Sun Life reported that its US employee benefits business unit had about 35,000 policyholders and more than $2bn of business in-force, covering about 12m lives.
Thompson has also spoken enthusiastically about opportunities in the voluntary employee benefits sector.
“That space [voluntary benefits] is the fastest growing segment of the group-insurance marketplace,” Thompson said at the Scotia Capital Financials Summit.
Sun Life, he noted, wants to become a top-five player in the segment within five years. At present, he added, a top-five position requires premium income of about $300m compared to the $100m Sun Life is generating at present.
Asset management and Asia
As its third strategic pillar Connor said Sun Life will support its MFS Investment Management unit’s growth in the US and other countries as well as broadening Sun Life’s other international asset management businesses.
“MFS has a large US presence and over C$250bn of assets under management globally,” said Connor.
Unsurprisingly, Sun Life has selected as its fourth strategic pillar developing markets, specifically those in Asia where it already has operations in China, India, Indonesia, the Philippines and Hong Kong.
“Today Sun Life Asia generates a little more than C$100m of run rate a year earnings for our shareholders and we see this as a significant opportunity that deserves a richer concentration of the company’s resources,” said Connor.
Undoubtedly Conner’s objective with Sun Life’s new strategy will be to put it back on a growth path that came to an abrupt end in 2007 when the insurer’s net income peaked at C$2.29bn. Since then, Sun Life’s net profit slipped badly and despite a recovery in 2010 remains well below historic levels with its latest third quarter results indicating that 2011 will be no different.
Notably, answering an analysts’ question Connor confirmed that in the absence of new growth drivers, Sun Life’s normalised “run rate” net income is between C$1.4bn and C$1.7bn, a level roughly in line with its 2005 net income.