18 November 2005

Dominic Do-Right

The Deal, Peter Moreira, 18 Nov 2005

On Sunday, Sept. 28, 2003, two cataclysmic events took place in Canada: Hurricane Juan slammed into the east coast, and Dominic D'Alessandro shook up Toronto's Bay Street.

D'Alessandro, president and CEO of Manulife Financial Corp. of Toronto, announced that his company would pay $11 billion in stock for John Hancock Financial Services Inc. of Boston. It was the biggest acquisition in Canadian history and immediately catapulted Manulife, which had demutualized in 1999, into the top tier of financial companies.

Though the havoc Hurricane Juan wreaked has largely been swept up, D'Alessandro's revolution continues to reverberate - and to pay returns to Manulife shareholders. It is now the second-largest company in Canada by market capitalization, exceeded only by Royal Bank of Canada, and the third-largest life insurer in North America, based on market cap, behind American International Group Inc. and MetLife Inc., both of New York.

More importantly, the Hancock deal has made Manulife a better company, improving profitability, boosting its shares and slashing its exposure to the Canadian market. In fact, in the first nine months of 2005, the U.S.'s contribution to Manulife's total profit was 30% larger than the Canadian component, effectively transforming the insurer into a U.S. company.

Manulife reported earnings of C$2.4 billion ($2 billion) for the first nine months of the year, up 33% from C$1.8 billion in the same period a year earlier, despite feeling the effects of a stronger Canadian dollar and property and casualty losses related to Hurricane Katrina. The company's profit in the first nine months of 2003 had been C$1.1 billion. "From the quarter that has gone by, the deal certainly looks to have gone well,'' says Ohad Lederer, an analyst with Veritas Investment Research Corp. in Toronto. "If there's downside, it's not evident.''

Adds James Keating, an analyst at RBC Capital Markets in Toronto, "This has proven an excellent deal, with distribution benefits better than expected, specifically in accelerated variable annuity and universal life policy sales.'' The company has improved profitability across a range of Manulife-Hancock product lines, Keating says.

Everyone was not always so high on the deal. The day after its announcement, Manulife's shares slid C$1.36, or 3.3% to C$39.49, and John Hancock lost 1.34%, to $33.84. Though the 18% premium to Hancock's previous day's share price seemed reasonable, analysts worried that the large deal would dilute Manulife's shares. They also wondered if Hancock was simply a consolation prize for Manulife, which had failed in bids to buy crosstown rival Canada Life Financial Corp. (which Great-West Lifeco Inc. of Winnipeg, Manitoba, bought for C$6.2 billion) and Canadian Imperial Bank of Commerce (a deal the Canadian government vetoed).

By the time the deal closed on April 28, 2004, however, Manulife's shares had risen to C$55, and as of Nov. 8, 2005, they had reached C$64.68 - a full 58% more than on the day the deal was announced.

D'Alessandro and his counterpart at Hancock, David D'Alessandro - the two are not related - promised savings of C$350 million over two years, and Veritas' Lederer says they appear to have made it. Dominic D'Alessandro told analysts on a recent conference call that projected synergies from the deal would likely reach $500 million. Another sign that synergies were achieved: Hancock's Canadian subsidiary, Maritime Life Assurance of Halifax, was integrated into Manulife within eight months of the deal's closing.

If the deal had one weakness, it's that it did not really strengthen Manulife's top management. Manulife is still run very much by Dominic D'Alessandro, aided by CFO Peter Rubenovitch, who has been with the Canadian company for a decade.

David D'Alessandro, placed in charge of the company's U.S. businesses when the deal was unveiled, left two months after the deal closed. John DesPrez III, who joined Manulife in 1991 as a counsel, now runs the U.S. operations.

Still, RBC's Keating says Manulife has gained expertise in businesses where it was absent previously, including banking, in which Hancock operates under the name Essex, and captive sales, which is branded John Hancock Financial Network.

So what does Manulife do next? Having approached Canadian Imperial Bank of Commerce once, press reports say Manulife may consider another bid if the Canadian government changes its policy barring bank-life insurance transactions. However, bancassurance is falling out of favor, with Citigroup Inc. and General Electric Co. ditching their life businesses in the past two years. Manulife is unlikely to pursue such a deal now.

The next likely option is to buy a U.S. insurer, though some say Dominic D'Alessandro may be content to grow the business organically. He is known as a disciplined acquirer and is no doubt reluctant to pay the current high valuations. "We are not proponents of further transformational U.S. deals, and we do not believe management are in that mindset either," Keating says.

Certainly, the outlook for the company is bright. A survey of 15 analysts by Thomson Investors Network show an average forecast of 18% growth in earnings per share in 2006, to $4.96 from an estimated $4.11 in 2005. Despite losses associated with Hurricane Katrina, Manulife has made a return on equity so far this year of more than 12%.

Meanwhile, Dominic D'Alessandro is proving he can do what no banker in Canada has done yet: transform a Canadian financial company into a largely U.S. company. And that is why his revolution has succeeded.