Dean Connor leans forward in his chair at the boardroom table at Sun Life Financial Inc.’s downtown Toronto offices, and starts talking about history. Connor, who took on the role of Sun Life’s chief executive in December, may only be starting his tenure at the life insurance company, but he’s well aware of Sun Life’s backstory. Over almost 150 years, the business has weathered every conceivable economic failure: weather that wiped out towns; battles that raged over entire continents; turmoil that rewrote financial systems. Sun Life, currently Canada’s No. 3 insurance company (by overall assets and market cap), has been through it all.
At the same time, the insurance giant rarely changes the top executive. Connor’s predecessor, Donald Stewart, was at Sun Life for 13 years, during a period when the lifespan of a typical CEO became shorter. There’s a lot expected of the individual at the top of Sun Life (TSX:SLF), something of which Connor is keenly aware.
“This company is closing in on 150 years and I think we’ve had like 10 CEOs over that time,” he says. “They brought us through two world wars and the Great Depression, and brought us through the Great Recession, though I’m not sure we’re even done that yet. So the point I’m raising is I look at what my predecessors had accomplished and they thrived by changing and my view is every company needs to keep changing.”
It’s late April when we meet. Connor’s been in the top job barely five months, yet so far he’s been good to his word. In December, immediately upon taking over the office, he made a few significant changes to Sun Life’s product mix and, more recently, laid out a new strategic plan for analysts. Connor is reimagining Sun Life, cutting away parts of the business he feels will otherwise be a drag on the company in the new reality, pushing further into Asia and transitioning increasingly into wealth management. For a company that prides itself in its history, they are bold moves. But Connor—an executive one analyst calls “unsentimental,” before adding, “and that’s a good thing”—sees the changes as making Sun Life stronger and more able to survive in a changing world economy. “Our balance sheet has been tested in a force 10 hurricane— or whatever the top hurricane is,” he says, smiling. “It has been painful, but I’d say we’ve come through it with strength there.”
Painful indeed. The financial meltdown of 2008 shook many insurance companies to their core, especially those that were underprepared for such a steep losses on the markets. Remember AIG? Here, Canada’s biggest insurer, Manulife (TSX:MFC), was probably hardest hit, taking huge losses after finding itself on the hook for billions in payouts on segregated funds, variable annuities and other products. Relatively speak- ing, Sun Life came through okay. Its share price fell from around $55 pre-crash to $12 a year later. In 2010, Sun Life earned $1.4 billion. Since mid-2009, it shares have traded at a comfortable premium to Manulife’s. The gap narrowed somewhat by the end of last year, however, when Sun Life posted a $300-million loss in 2011 compared to Manulife’s $129-million profit.
The industry’s first blow, in 2008, came from falling markets. The second has been delivered by the extended period of low interest rates ever since, as the U.S. Federal Reserve struggles to prop up the moribund U.S. economy and the Bank of Canada has more or less followed suit—a condition that isn’t likely to end anytime soon. This is so crippling for insurance companies because they traditionally make most of their steady profits reinvesting income from policy premiums in fixed-income investments—usually rock-solid government bonds that provided a reliable return. That opportunity has evaporated, forcing Sun Life and its competitors to reevaluate the foundation of their existence, make significant changes and evolve.
In Connor’s case, after a strategic review of the company’s operations, he announced in December that Sun Life would stop selling variable annuities in the U.S., cut 800 jobs and take a charge of more than $75 million. The problem was that variable annuities offer a minimum guaranteed rate of return and regulators force insurance companies to commit additional capital to guarantee the products. “He showed his thinking when he made the decision to stop selling [variable annuities],” says National Bank analyst Peter Routledge. “That is something his predecessor would have had trouble doing. Dean didn’t wait and try to put it gently—he just said, ‘I don’t like the numbers and we’re done.’”
Now that he’s studied the company’s business units, Connor has devised a strategy for the next three years. He’s trying to move into more lucrative group insurance plans, urging the company forward into the potential of the Chinese and Indian markets, and ramping up customer service to increase Sun Life’s presence in wealth management. It is a big bet that could be as much of a litmus test for the industry as it is for Connor and Sun Life.
Dean Connor has a strong sense of the way forward for Sun Life, and hasn’t been afraid to express his opinions. From the outside looking in, at least, that’s led analysts and observers to draw some clear distinctions between Connor and former Sun Life chief executive Don Stewart, who was known for being taciturn and conservative. It wasn’t an entirely fair characterization. Under Stewart, Sun Life went public, bought Boston-based Keyport Life Insurance Co. for $2.6 billion and Clarica Life of Waterloo, Ont. for $7.3 billion. But the company’s reputation as a staid, conservative insurance giant remained.
When Stewart’s intention to retire at the end of 2011 was known to the board, they went seeking a successor. Connor, who’d joined the company in 2008 to run its Canadian operations and was by then COO, stressed in his interviews that big alterations were needed. “I had a deep understanding of the business—what was working and what was not working and needed to be changed,” he says.
There are reasons to think Connor can carry through with a change in strategy. Unlike many at the company, he has only been at Sun Life for a few years. He joined the insurer after a near-30-year career at Mercer Human Resource Consulting, where he’d risen to be president of North American operations. “It [is] significant that he [is] an outsider,” says one analyst who asked not to be named. “He’s done more than just Sun Life. He’s had international experience and has broader focus than just Canada. There’s a lot there. He brings outside perspective.”
As soon as Connor was named to the job last summer, he immediately began a strategic review of the business’ operations. Though one would not mistake Connor as someone drawing attention to himself—he’s impeccably dressed for this interview, but isn’t flashy in an understated suit that seems to match his friendly, if careful personality—his review confirmed his and the board’s suspicions: Sun Life was going to have to refocus, pushing more into Asia and jettisoning some fundamental parts of the business. Connor recognizes the conservative necessity that comes with being an insurance company, but also understood he’d have to make some tough decisions if Sun Life was going to prosper.
“I’d distinguish between the conservatism you have to have on the balance sheet to make good on the obligations you have to make good on 30 or 50 years from now,” he says. “Our business is one of trust and that requires a high degree of conservatism in the balance sheet. I’d distinguish that from a high degree of aggressiveness in building the business.”
Connor’s decision to pull the plug on selling individual life insurance in the U.S., as well as doing away with variable-rate annuities, is expected to save the company around $300 million yearly. That’s due largely to savings in capital it no longer needs to have in reserve to cover potential losses. The decision also frees up capital that could be repositioned at higher-growth parts of the business, like wealth management, which accounted for 65% of new business in 2012.
Connor put his decision to shutter sections of the U.S. operation in greater context when he unveiled his strategic plan in March. The plan, which was outlined on an investor call and reaffirmed at the company’s annual meeting in May, sees Connor calling for $2 billion in net income by 2015, with a return-on-equity of between 12% and 15%. As well, the company is planning on continuing to move away from higher volatility products that aren’t as sensitive to interest-rate fluctuations, as it shifts its focus to Asia, as well as to wealth management and group benefits in the U.S. (across all product areas, the U.S. currently accounts for about 37% of Sun Life’s business). “What was clear to us is we needed to reposition the company so more of the capital is backing business that will play in those spaces and less in areas that bring volatility,” Connor says. “You have to look at the next quarter, the next year and the next decade. A lot of things we do won’t be profitable for years.”
Many analysts came away impressed by Connor’s ambitious—and apparently realistic—approach to repositioning Sun Life. National Bank’s Routledge says Connor’s basis for earnings growth factors in only a 30-basis-point increase in interest rates, a figure that is actually pessimistic. “And that’s because Sun Life has been more advanced in terms of the current interest rate environment than other life insurance companies,” he explains.
The interest rate scenario is worthy of deeper study. Many, Routledge included, have questioned what happens to insurance companies like Sun Life if North America experiences years of low interest rates, even outright deflation, commonly referred to as the “Japan-like scenario.” Called “gyakuzaya,” in Japanese, the situation refers to “a negative spread,” or a deflationary period that started there in the 1990s. In the decades prior, insurance companies offered whole-life insurance policies and lifetime annuities with guaranteed returns of 5.5% that were not flexible if interest rates declined. When interest rates plummeted by 300 basis points starting in 1990, seven Japanese insurance companies eventually went bankrupt.
Connor insists regulatory policies ensure Sun Life is safe against the same situation. “One of the staples is Japan. And we’ve been testing for this scenario for a number of years and going back to 2007 we battened down the hatches,” he says. “We changed our investment mix, reduced interest sensitivity in our balance sheet and dialed back on products that were interest sensitive. And we still went through a lot of pain as a company…having marked the balance sheet to market against the lowest interest rates we’ve seen. You go back to 1919 and look at U.S. Treasury Bill rates—you can’t find rates this low.”
Indeed Sun Life is a safe bet to ride out a long-term period of low interest rates, says Routledge, but investors might not be pleased with the result. “You might not want to be an owner of the shares, but the company will pay premiums, and maintain solid capital,” he says.
To slip out from under the interest rate cloud, Connor is placing an increasingly large bet on moving Sun Life further into the wealth management space as well as forging new business in India, China, Hong Kong and the Philippines. Connor has made almost a trip a month to Asia since taking over as CEO, recognition of the importance the region plays to the insurance company’s future. In China, Sun Life partnered with China Everbright Group Ltd., an established financial institution, while it entered into an agreement with India’s powerful Birla family to gain a foothold there.
“These markets aren’t for the faint of heart—lots of things do change,” Connor says, noting he’ll be slowing his travel to Asia in the coming months, though he still expects to be there a half-dozen times a year. “We cover 70% of the population in Asia and 90% of the growth in our industry in the next decade will come from there. We’re in the five countries that matter.”
Connor says currently Asia accounts for only 8% of Sun Life’s earnings. By making it one of the pillars of the company’s strategy going forward, Connor is hoping to expand it to 20%. “Not all of these bets will pay off and they aren’t enormous when you stand back and look at the amount of capital we have put behind them,” he says. “The products we sell there are relatively capital-light.”
However, China could be a difficult market to make money in, says one analyst. “If you read it on paper it looks like a fantastic place to be—but I think it’ll be tough,” the analyst says. “If you are a foreign player in China will you really be able to extract the capital needed to make it work? I’m not sure anyone knows the answer.”
Routledge credits Connor for thinking long-term but doesn’t think Asia will pay off significantly for the new CEO. “It is a reasonable strategy and if India ever loosened their foreign ownership restrictions, they’d be in a good position,” the analyst says. “But I just don’t see it as a three-year growth strategy. My take is the demographics are fantastic but [in India] it is young people buying small amounts of life insurance. So it is great to build the infrastructure and brand for 10 years from now. It is something his successor will take credit for.”
The other area Connor is betting on is wealth management. His take is that Sun Life—with 3,600 employees in 95 centres across Canada alone—is well positioned to offer its services to an aging population looking at retirement. “If you look at the theme of the baby boom, we have a full set of products from GICs to mutual funds to segregated funds—a broader suite of products than banks have,” he says. “That is proving to be a powerful story. We see that pillar becoming a more and more important part for us.”
But, just like the move into Asia, it is unlikely the shift to wealth management will happen fast enough to replace lost income due to low interest rates. “As Sun Life makes this transition into group insurance and wealth management, the process won’t be quick or easy and I think earnings could stagnate or slow,” says Canaccord analyst Mario Mendonca.
While he repositions the company’s focus, Connor has also been busy putting a stamp on its personnel. In particular, he changed the role of Kevin Strain, formerly vice-president of individual insurance and investments in Canada, to head up the ever-important Asian operations. He also elevated chief brand officer Mary De Paoli to executive vice-president status to improve customer experiences in the important wealth management section.
The board has been altered as well. Insurance veteran Jim Sutcliffe, a director since 2009, took over as chair late last year. And at the May AGM—where Connor was able to take the podium the same day Sun Life released stronger than expected results for the first quarter of 2012—former RBC executive and Research in Motion Ltd. chair Barbara Stymiest was elected as a new director.
Connor’s goal, at its most basic, is to fine-tune Sun Life so it will be able to deal with any changing fiscal reality. If interest rates rise, it will benefit, but if they remain flat, Connor thinks he has a strategy that will help buoy the company regardless.
“The great thing about the insurance business that is masked by the volatility in the capital markets, is you stand back and look at the fundamental demands for our business and they are very strong,” he says as our interview nears a close. “It is pretty clear that Sun Life has some really remarkable opportunities in front of it and it was a question of focusing on what will matter most in the next decade.”
Slider photo: Jeff Kirk