Manulife Financial Corp. is looking at potential takeover targets and is more likely to spend its money on an acquisition than a dividend increase in the next couple of years, its CEO says.
Don Guloien said Thursday that the insurer now faces fewer risks and has "some serious amounts of excess capital that could be deployed." His comments came after the company reported first-quarter profits of $985-million, beating analysts' expectations.
Mr. Guloien reminded analysts on a conference call that Manulife last year made a play for a large Asian life insurance unit - although he did not name the company, it's well known that Manulife looked at AIG's massive American International Assurance Ltd. both before and after Prudential PLC's $35.5-billion (U.S.) deal for it fell apart. AIA went on to hold an initial public offering in Hong Kong last fall.
"We have cultivated through the whole piece relationships with investors that would be prepared to co-invest with us on large transactions," Mr. Guloien said. "We know the people who have the money who could enable a deal like that to happen."
Mr. Guloien and Manulife's other executives made it very clear that they are spending more time thinking about making deals than raising the company's dividend. During the financial crisis, Manulife took the dramatic step of slashing its dividend in half to preserve its capital levels, which it had been forced to shore up because of its exposure to stock markets.
While some banks have resumed dividend increases in the wake of the crisis, Mr. Guloien suggested that's still a long way off for Manulife - regulators are still deciding what the new capital rules will be for insurers, and it's not clear what the impact will be.
"Until capital rules get finalized, and that's a whole international exercise, it would be improper to speculate on dividend increases," Mr. Guloien said in an interview.
The same is not true of using capital to make an acquisition. "If you do an acquisition, you get a stream of earnings associated with the acquisition, it adds to your earnings base. So it's another form of financial strength," Mr. Guloien said. "And frankly, if you have excess capital, unless it's very well deployed earning a good return, it's idle capital. So if you can employ it in an acquisition earning, let's say, 16 per cent, that improves your earning outlook going forward and further strengthens the company."
Chief financial officer Michael Bell added in an interview that "in all likelihood an acquisition would also diversify our overall portfolio of businesses as well, which would actually strengthen our overall position." Mr. Bell told analysts on a conference call that "if we saw an attractive acquisition tomorrow that strategically made sense, economically made sense and further diversified our business, we would be all over it."
Mr. Guloien said that the new certainty that banks have about their capital requirements, as well as the continued uncertainty surrounding insurers, should create more potential takeover opportunities. "I think Basel III and speculation about capital levels going forward are going to cause companies to unload certain parts of the business, and that's going to create some interesting opportunities for us," he said during the interview.
He also cautioned regulators and accounting standard-setters against bringing in strict new rules that he suggested would damage the industry, saying that Canada already has one of the world's strictest capital regimes.
"The public policy implications, if accounting and regulatory changes are implemented poorly, are significant," Mr. Guloien told shareholders at the company's annual meeting in Toronto. "This could include higher prices and, even more importantly, the end of long-term guaranteed insurance and annuity products due to prohibitive levels of capital and accounting volatility."
He added that if Canadian insurers can't compete as effectively with those abroad because of stricter rules, "this would mean a smaller Canadian financial-services sector, a less diversified and less competitive industry, and fewer jobs for Canadians."
The company's earnings, which amount to 53 cents per share, took into account a $151-million previously disclosed charge related to the earthquake in Japan. Manulife earned $1.2-billion or 66 cents per share in the same period a year ago.
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