Sun Life possibly selling — and buying

A financial services clearance sale may be underway, possibly culminating in a radically-altered landscape for the American operations of Toronto-based Sun Life of Canada. Massachusetts Financial Services Company, generally known as MFS Investment Management, is rumoured to be for sale. Sun Life will only say that it has hired investment bankers to “advise on strategic alternatives.” MFS is based in Boston and is a wholly-owned Sun Life subsidiary.

A company buying MFS would need deep pockets and, to coin a mutual fund investing term, a long-term growth horizon. MFS has suffered in credibility and sales since the market-timing scandal and is in net redemptions in some U.S. domestic growth strategies. Still, it shows positive sales in global and fixed income strategies, explains Laura Lutton, fund analyst at Chicago-based Morningstar.

The MFS culture may not make for an easy fit with another management company, Lutton adds, noting that MFS makes decisions after across-the-board group discussions, meaning that an equity chosen by the manager of one fund turns up in other funds. “There is some integration risk,” she says. “If the buyer wanted to merge the investment processes with something that already existed, that would be a big adjustment for everybody.”

In one scenario — also greeted with silence when questioned about this — Sun Life is kicking the tires at Chattanooga, Tennessee-based UNUMProvident. (Rumours also suggest that Toronto-based Manulife Financial and Winnipeg-based Great-West Life have also looked, but their operations and strategic outlooks work against either of them buying UNUMProvident.) For Sun Life, selling MFS and buying UNUMProvident could amount to swapping one set of credibility and market problems for another.

The potential benefits are not as clear as the 2003 deal in which RBC Insurance took over UNUMProvident’s Canadian operations. That deal fulfilled RBC Insurance’s then-stalled goal of expansion through acquisition, including its living benefits business, and UNUMProvident’s decision to exit Canada, using the proceeds to bolster its cash reserves.

Still, buying UNUMProvident would have the same effect for Sun Life — a larger stake in the American market — as did Manulife’s purchase of Boston-based John Hancock Financial. The deal would also provide Sun Life with a large book of disability insurance business.

“It would give them immediate name recognition in a line of business where UNUM has recognizable and major market share,” says William Pargeans, assistant vice-president at Oldwick, New Jersey-based A.M. Best Company.

If Sun Life were to assume UNUMProvident’s disability book without provisions for future costs, it could pose a problem, according to Miami Beach, Florida-based consultant Caryn Montague, who often serves as an expert witness in disability insurance court cases. UNUMProvident has an estimated quarter-million DI cases eligible for review, she says. (A review takes place after an unsatisfactory claims payment and decline of settlement.) She adds that the true number is impossible to estimate without taking into account DI legal issues surrounding settlements from companies that UNUMProvident has taken over, for example, The Paul Revere Life Insurance Company.

“If Sun Life is just looking to buy the group life insurance, there may be no headaches whatsoever,” Montague explains, because there are no known legal issues with UNUMProvident’s group business book. “We can’t really estimate the dollar cost, [as] we really don’t know what they are looking to buy.”

Still, even if Sun Life, or anyone else, buys UNUMProvident and excludes the DI book and associated problems, there could be a hidden cost. The DI issues may have tainted UNUMProvident’s image in other product lines, and, as such, the buyer could conceivably face a branding problem within its distribution network. The negative profile could carry over, says Montague. “I think there are a lot of brokers who would become skeptical about selling the UNUMProvident name because of what has gone on.”

Such a deal, if consummated, would give Sun Life UNUMProvident’s long-term insurance business, which it has marketed very heavily. Sun Life would also get a large book of business in a product line known as work-site marketing — in which brokers go into the workplace to sell policies designed to supplement employer-provided coverage. Work-site marketing is seen as a growing area and is becoming increasingly popular in the United States. Taking over UNUMProvident might leave Sun Life in a position to ride a rising product wave.

“They [UNUMProvident] are number one in work-site marketing,” says Carl Austin, also assistant vice-president at A.M. Best. “Colonial [Columbia South Carolina-based Colonial Life & Accident Insurance Company] is number two.”

Al Emid is a Toronto-based financial journalist covering insurance.

(12/18/06)