Sun Life Financial Inc. is retreating from two staples of its U.S operation, stung by a bleak economic outlook and incessant market volatility that has made it difficult to sustain the traditional life insurance model.
After a strategic review by new chief executive officer Dean Connor, the Canadian insurer said it will no longer sell individual life insurance and variable-rate annuities south of the border. The transition will save Sun Life $300-million a year in capital that it no longer has to set aside to protect against the potential losses.
Both products are core to the insurance business. Life insurance pays out a lump sum in the event of a death, while annuities are like individual pensions that pay out as policy holders age. But the economics of both have changed dramatically because of the chief problem that is plaguing life insurers everywhere: low interest rates.
The premiums insurers collect are typically invested in long-term bonds, but 30-year U.S. Treasuries now pay only 3 per cent interest annually, which makes it far more difficult to meet their obligations on insurance policies or annuities decades from now. The uncertainty forces them to set aside additional capital in reserve funds, soaking up money they would otherwise invest under their expansion plans. In Sun Life's case, the company is looking to grow in U.S wealth management and group benefits, business lines that carry less risk for the company.
Stock markets aren't any more comforting. Because they continue to bounce around – at one point in October the TSX climbed 12 per cent, only to shed two-thirds of that gain during a November slump – life insurers can't risk investing a large proportion of their assets in them. That means they must settle for lower-returning assets – primarily bonds that are now carrying rock-bottom interest rates.
The problem is so pressing that just a few weeks ago that Standard Life Assurance Co. of Canada decided to stop selling individual life insurance in Canada. After operating here for 178 years, sales of these contracts had dwindled to such a level that it no longer made sense for British-based Standard Life PLC to keep offering them.
Meanwhile, the insurers that still offer individual life contracts have raised their prices, many of them twice this year, with Manulife leading the pack. If individuals want to buy these contracts, they are going to have to pay more for them. Rather than ask cash-strapped Americans to do just that, Sun Life is exiting the business altogether.
It is quite a reversal from 2008, when Jon Boscia, then president of Sun Life, told The Globe and Mail: "We are not a significant company in the U.S. at this point in time, but we desperately want to be."
Shortly after making those comments, the company decided to rework its strategy. "We started talking two or three years ago about the importance of reducing our exposure to long-dated, irrevocable products," Mr. Connor said in an interview.
Sun Life's management team was active in containing losses by hedging its variable annuities, something rival Manulife did not do until the financial crisis kicked into high gear. Yet Canadian capital rules don't offer them any credit. That means Sun Life receives no extra wiggle room even though hedging has "been tested in a crucible of the most challenging financial markets we've seen in decades and it's worked," Mr. Connor said.
Sun Life must comply with what the firm believes are Canada's over-stringent requirements because it is based here. "The U.S. capital rules are probably a bit on the light side, and the Canadian capital rules are very clearly far too conservative," Mr. Connor said. Their main difference: Canadian firms must assume that current interest rates will persist forever, while U.S. rules assume that interest rates will return to their long-term averages.
But David Nish, the CEO of Standard Life PLC, the parent of the Canadian arm that is shutting down its individual life insurance business, believes that such caution is good from a regulatory standpoint – just not for profitability.
"Everyone assumes that the turmoil we're seeing is going to be over soon," he said during a recent trip to Toronto. "It's not."
"One of the things I've found management teams are not good at is actually believing the worst will happen," he added.
Instead of waiting it out, Sun Life is freeing up capital to redeploy it in the four pillars of its new growth strategy: Sun Life Canada, its main business; employee benefits and group pensions in the U.S.; MFS, its U.S. asset manager; and its growing Asian operation.
On a conference call Monday, Mr. Connor said these pillars are tied to three long-term drivers of demand in the industry: the retirement of baby boomers, the shift of responsibility from governments and employers to individuals, and the growth of Asia's middle class.
Because growth in these markets is widely expected, CIBC World Markets analyst Rob Sedran believes they will draw fierce competition. "The new focus in the United States will not see the company exploiting an underserved niche market, just ones that are less capital intensive," he wrote in a note to clients. "Execution will be key and, even with that, success is far from a foregone conclusion in what remains a stressed environment."