Last year was a challenging one for Sun Life Financial. In his CEO message in the company’s annual report, Dean Connor called earnings and return on equity “disappointing”. In an exclusive interview with The Insurance and Investment Journal, Mr. Connor shared his views on the company’s plan to turn around its financial performance.In 2011, Sun Life reported a loss of $300 million, compared to reported net income of $1.406 billion a year earlier. Reported ROE stood at negative 2.2%, compared to 10.2% in 2010.
Seeking brighter days ahead, Sun Life announced its objectives for growth and profitability on March 8 at its Investor Day event. “We’ve set ourselves an ambitious target of $2 billion of earnings by 2015 and that would be 12 to 13% ROE,” said Mr. Connor during the interview held at Sun Life’s headquarters in Toronto in mid April.
Mr. Connor added that while this goal is ambitious, it is also achievable. How will they get to $2 billion? Growth in the Canadian market would be a major contributor. The 2015 operating net income target is $900 million (from $660 million adjusted earnings in 2011). Growth is also targeted for Asia, the U.S. and the company’s mutual fund firm MFS Investment Management.
Four pillars of growth
The company’s growth strategy aims to take Sun Life “to the next level” by focusing on four pillars of growth, says Mr. Connor. The first pillar is to become the best performing life insurer in Canada (see article, page 28). The second pillar is to enhance the company’s United States’ group benefits and voluntary benefits business. The third pillar is to grow Sun Life’s asset management business globally and the fourth is to grow its business in Asia. “By concentrating on these four pillars of growth we really see a tremendous opportunity to take advantage of three big demand drivers – the three big mega trends driving demand for what we do around the world,” states Mr. Connor.
Three mega trends
The first of these mega trends is the aging of the baby boom population, which is now coming up to retirement.
The second is the downloading of responsibility from governments and employers to individuals, i.e. the trend from defined benefit to defined contribution plans, or the trend of employers ending retiree health care coverage.
The third mega trend is “the astonishing growth of the middle class in developing countries like China and India and Indonesia,” explains Mr. Connor.
Indonesia, for example, is the fourth most populous country in the world with 240 million people and a growing middle class. The top 80 million people can afford to buy insurance, but only five million have done so. “So you look at that and you say, ‘let’s go talk to the other 75 million.’”
Life and health rollovers
In the group benefits and retirement market, Sun Life is also looking for continued growth in the area of pension rollovers. When group members leave their employers, Sun Life calls them up to invite them to leave their pension assets with the company and has now more than 110,000 customers in its asset rollover business. “Last year we did over a billion dollars of wealth sales that way in Canada.”
By doing rollovers, Sun Life is preserving assets that otherwise would have left the company. In some cases it even leads to increasing these assets since many people will decide to consolidate their other investments with the company. Mr. Connor believes this strategy could also be implemented outside of Canada, particularly as part of its U.S group benefits platform.
The insurer also offers life and health insurance rollovers to departing employees. This connects with the mega trend of governments and employers downloading responsibilities to individuals, adds Mr. Connor. Increasingly, people do not know if their employer will continue to offer retiree health benefits, or perhaps they may have already eliminated them. “So, we’re doing a lot of business there…”
Challenges for the industry
With its sights set on growth, Sun Life, like other insurers, continues to face a difficult business environment. What worries Mr. Connor most? “I’d say low interest rates are obviously challenging for most life insurance companies.”
If a client bought a universal life policy some years ago, then the insurer would have assumed it could earn six or six and half per cent interest on all the assets being accumulated in that policy.
“It turns out we can’t in this environment. Long Canada bonds are yielding in the twos. It’s astonishing really how far interest rates have fallen.”
And yet insurers can’t go back and change the premiums on long term guaranteed products. “So the peace of mind that we bring, the financial security that we bring, the flip side of it is we as an industry have to shoulder that. Low interest rates are a challenge for these long dated products where the prices are locked in.”
Because of this challenge, Sun Life is slowly shifting its emphasis away from long dated irrevocable products that cannot be repriced. “I don’t think we’ll ever get completely away from them. For example, level cost of insurance universal life is a mainstay. It’s a cornerstone product in the life insurance business and our view is that it’s an important product and it has a role to play on the shelf.”
However, the company aims to sell less UL and sell more products such as its par whole life “where we share in the investment experience with the par policyholder.”
On April 30, Sun Life announced the suspension of sales of its guaranteed withdrawal benefit (GWB) product in the independent channel. While The Insurance and Investment Journal’s interview with Mr. Connor was held prior to this announcement, he did discuss the difficulties faced with this product category.
“I think the challenge in that particular product, at least in this environment today, is that the capital requirements are very, very heavy.” For this same reason, in December 2011 Sun Life decided to stop selling variable annuities in the United States market.
He added that the company had been quite deliberately reducing sales of its GWB product over the last few years. “That’s back to the product mix change. What we’re trying to do at the same time is build out our mutual fund capabilities because those have very little capital requirements behind them, so you saw us launch a mutual fund company called Sun Life Global Investments and we’re off to a very good start.”
Does he have a message for advisors who are continually dealing with product and pricing changes from insurers?
Mr. Connor says advisors care about the financial strength of their suppliers and Sun Life’s MCCSR ratio of 211 percent at the end of 2011 speaks to this strength. “We do say to advisors that one of the reasons we have a strong balance sheet is that we manage risk – and we have to manage risk well. And that means making course corrections and adapting to environments as quickly as we can without overreacting.