03 December 2008

Manulife Expects Q4 2008 Loss of $1.5 Billion

The Globe and Mail, Tara Perkins, 3 December 2008

Expecting to suffer its first loss as a public company, Manulife Financial Corp. is reluctantly tapping the market for equity, the second Canadian financial institution to do so in as many weeks because of investor pressure to boost softening capital levels.

Chief executive officer Dominic D'Alessandro said in an interview yesterday the equity move is "not what I would have preferred to do, but like everybody else, when the facts change maybe it's an indication you should change your position."

The move will put Manulife in a position to not be left out of the race for acquisitions as the global life insurance industry goes through a round of consolidation.

Manulife is issuing at least $2.125-billion of common equity to raise its capital levels, which have been walloped because of the company's large exposure to stock markets.

It now expects to lose $1.5-billion in the fourth quarter, the first time it has not earned a profit since going public in 1999.

On a mid-October conference call, Mr. D'Alessandro told analysts that the insurer remained very well capitalized and "we have no intention to issue equity capital, contrary to speculation that came to our attention." Instead, Manulife went on to arrange a $3-billion loan from the big banks to bolster its financial cushion.

But stock markets continued to tank, eating away at the large investment portfolio that Manulife holds in its variable annuity and segregated funds business. As those investments sink, Manulife is required to put more money aside as capital. Its shareholders weren't satisfied.

"We thought the $3-billion facility that we put in place had allayed the concerns that were out there, but it didn't do the job," Mr. D'Alessandro said in yesterday's interview. "Our stock price kept suffering from weakness and we kept hearing from investors and other people close to the company that maybe we should just bite the bullet and put it behind us because no one knows how long these uncertain times are going to be with us."

The company would not have changed its tune if it were convinced that this was "a passing storm," he said. "But it may endure for a while and we don't want to be in a position where there are all kinds of things happening in our business and we're on the sidelines."

Shane Jones, managing director of Canadian equities at Scotia Cassels, which owns Manulife shares, said the company should have taken action sooner. "Now they've come to market at the bottom. If they had raised equity a month ago they would have done it at a better price."

Raising more equity will safeguard the insurer from further declines in stock markets as well as boost Mr. D'Alessandro's ability to snap up more assets before he leaves his post in May.

Manulife chief investment officer Don Guloien, who will replace Mr. D'Alessandro when he retires next year, has met with bankers to examine parts of American International Group Inc., sources have told The Globe and Mail. Manulife is also believed to be keeping an eye on U.S. rivals whose share prices have been battered by the financial crisis.

Last week, Toronto-Dominion Bank CEO Ed Clark decided to issue $1.4-billion of common equity, days after suggesting he would do no such thing. Like Mr. D'Alessandro, Mr. Clark also said he faced pressure from investors.

The sudden death of massive financial institutions such as Lehman Brothers has caused the market to attach a new importance to capital, which provides firms with a buffer in times of trouble. The capital ratios of all of Canada's largest banks and insurers have remained well above the minimum levels that regulators require, but that's no longer good enough.

Mr. D'Alessandro believes that the capital requirements for Canadian life insurers, dictated by the Office of the Superintendent of Financial Institutions, are still too strict. OSFI changed the rules in late October to give Manulife and its rivals more breathing room. But Manulife is still required to put aside large amounts of capital each time stock markets drop.

"Markets go down 10 per cent and you've lost 15 points of your elbow room," Mr. D'Alessandro said.

With the new equity, the insurer's capital ratio (called the MCCSR, or Minimum Continuing Capital and Surplus Requirements) will be about 235 per cent, one of the highest levels in the company's history. Manulife aims to keep the ratio between 180 and 200 per cent, and OSFI requires that it remain above 150 per cent.

Manulife will now pay back $1-billion of its bank loan and sell $1.125-billion of equity by way of a private placement to eight existing institutional investors such as the Caisse de dépôt et placement du Québec, the investment arms of big banks including Royal Bank of Canada and Toronto-Dominion Bank, and Jarislowsky Fraser Ltd. A further $1-billion is being sold to the public in a bought deal. The new equity is being issued at $19.40 a share.
Financial Post, Eoin Callan, 3 December 2008

Manulife Financial is moving to shore up its capital base after falling into a loss for the first time in its history as a public company.

Canada's largest insurer will issue $2.125-billion in common equity at a discount after seeing its capital base eroded amid extreme volatility in financial markets.

The bid to raise cash underlines how the ongoing financial crisis is draining reserves from the country's financial system.

The insurer expects to lose $1.5-billion this quarter, as revenues decline and investments lose value in the face of a global economic slowdown.

Dominic D'Alessandro, chief executive, said: "We are disappointed with this poor performance."

A key reason for the poor performance is the need for the insurer to back stop losses on investments made to support financial products sold to Canadians and Americans that guaranteed minimum returns.

Manulife enthusiastically joined in an industry craze selling segregated funds or variable annuities to customers the promised them investment income as they prepared for old age.

But that business model has broken down amid the seize up in credit markets, and Manulife said on Tuesday it will be forced to set aside an extra $4.5-billion on Dec. 31 to cover these "guarantees".

This move comes even after Ottawa loosened accounting rules at the behest of the insurer, allowing it to set aside less reserves than under the old system.

The bid to raise capital is a climb down for the chief executive, who retires in the spring after 14 years and had insisted the company would not need to issue common equity.

The shares will be sold in a public offering at a heavy discount at $19.40 per share.

The share issue will include $1.125-billion sold by way of private placement to eight existing institutional investors and $1-billion to a syndicate of underwriters.

The move comes after the company signed an agreement to borrow $3-billion from the country's top banks only weeks ago.

That credit line will now be reduced to $2-billion.

Manulife shares are expected to slide at the open to close to $20 per share, according to analysts.

TD Bank Financial Group made a similar move to shore up its own capital position last week. TD said it was being forced to brave extremely volatile markets with a bid to raise up to $1.2-billion in cash, after coming under pressure from investors to take action over its shrinking capital base.

The TD action led one analyst to suggest Manulife also turn to equity the markets. John Reucassel, an analyst at BMO Capital Markets, said that TD had done the insurer a favour by testing the market and proving investors were willing to back share issues.

"We believe that this could provide Manulife with an opportunity to also raise equity and strengthen its capital position in the face of volatile equity markets," the analyst said in a note to clients.
Reuters, Lynne Olver, 2 December 2008

Manulife Financial Corp explored various options to boost its capital levels before announcing a big equity issue on Tuesday, which it went ahead with partly to stay in the acquisition game, Chief Executive Dominic D'Alessandro said on Tuesday in an interview.

A C$3 billion ($2.4 billion) loan facility that Manulife arranged in early November was not sufficient to shore up capital when stock markets were getting increasingly volatile, D'Alessandro told Reuters, making it "prudent" to issue common shares. A preferred equity issue would have been too small, he added.

"We wanted to be in a strong position to participate in any of the restructuring activities that may happen," he said.

The credit crunch and ensuing financial crisis, which has walloped many insurance companies' stock prices, has made Manulife the largest insurer in North America. It may also be the catalyst for consolidation of the fragmented U.S. industry, he said.

"Had we not done this issue, we might have been constrained in what we could look at or what we could entertain."

Earlier on Tuesday, the company said it would raise C$2.1 billion by issuing common stock at a price of C$19.40 a share.

The stock closed at C$19.89 a share, down 2.8 percent.

The CEO said he regrets having to issue shares, but that most people understood the company's dilemma -- as stock markets fall, it is forced to set aside more money to cover future obligations to certain policyholders.

"I'd like to say I'd rather have cut off a leg than issue equity at these prices, but on the other hand, we are where we are and the markets remain very volatile," D'Alessandro said, referring to Monday's steep stock-market plunges.

"You saw what happened yesterday, and you have to adjust your thinking for events as they unfold."

D'Alessandro said on a conference call in mid-October that Manulife was not contemplating an equity issue.

At that time, "we were feeling that maybe the worst of the storm was already upon us," he said.

"The events since October have been, if anything, even more dramatic. It's a case of changed circumstances. If I had my druthers, I'd rather not issue equity at these prices."

Manulife sold C$1.125 billion of shares by way of private placement to eight existing institutional investors and C$1 billion to a syndicate of underwriters in a "bought deal" public offering, both led by Scotia Capital Inc.

The company also said it expects to report a fourth-quarter loss of C$1.5 billion ($1.2 billion) due to the effects of falling stock markets.