Stephen Jarislowsky slams Manulife

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Manulife Financial Corp. chief executive officer Donald Guloien is confronting some angry shareholders following the company's $2.5-billion share sale to bolster capital levels to record highs.

"I was terribly disappointed because I was left very much under the impression that the company, if they cut the dividend, would have fortress levels of capital and that the last thing they wanted to see was more share dilution," said Stephen Jarislowsky of Jarislowsky Fraser Ltd., one of the insurance company's largest shareholders.

"I think it's pretty godawful that there was really no warning about this coming, and all of a sudden this dilution came about," he said.

Manulife shares fell sharply on the Toronto Stock Exchange Thursday, a day after Canada's biggest insurer announced another stock issue.

Late Wednesday, Manulife said it sold stock at $19 a share to an underwriting syndicate headed by RBC Dominion Securities Inc. and Scotia Capital Inc.

The move by Canada's biggest insurer shows some financial services companies remain concerned about the future of stock markets and the economy, despite the rally in equities that has played out since March.

By contrast, rival insurer Sun Life Financial Inc. said Thursday it is comfortable with its capital levels.

"We've been consistent in saying we believe we have a very high quality capital position," Sun Life president Jon Boscia told analysts and investors at its U.S. investor day in New York.

Noting that Sun Life issued $500-million in additional Tier I capital Wednesday, Mr. Boscia said: "We are very comfortable with our current position."

Still, when asked whether an acquisition might change the company's need for capital, Mr. Boscia said it would.

"I think an M&A transaction would certainly have the potential to change it," he said.

This is the second time in less than a year that Manulife has tapped the markets. It sold $2.275-billion in stock last December to shore up its capital, five months before Mr. Guloien took over from his predecessor Dominic D'Alessandro.

After taking the reins, Mr. Guloien took another major step to bolster the financial cushion, surprising investors with a dividend cut in August that will save the company about $800-million a year. That move made Manulife the first major Canadian financial institution to chop its payout since the early 1990s, and sent the stock tumbling 15 per cent in one day.

Since becoming CEO, Mr. Guloien has often said his goal is for Manulife to build high levels of capital so that he will not have to repeat the worrisome period that Mr. D'Alessandro went through in the fall of 2008 when stock markets tumbled. Manulife's capital levels, although always above the bare minimum level required by regulators, sank because of its massive stock portfolio.

That portfolio stems from the company's large variable-annuity business, which sells products similar to personal pension or retirement plans. Manulife invests a customer's money and guarantees minimum future payments. Much of the money is invested in stocks, and Mr. D'Alessandro decided years ago to leave the stock portfolio unhedged, exposing its value to the swings of the market.

Credit Suisse said in a research note that it was lowering its per-share earnings estimates to 93 cents for 2009 and $1.85 for 2010 to reflect the dilution, and its target share price to $19.

"This capital move is a surprise given the recent comments made by CEO Donald Guloien that Manulife will take its time to achieve their stated goal of a 'fortress' balance sheet," Credit Suisse said. "That said, the pro-forma capital position will 'ring fence' a large portion of the market risk associated with the company's unhedged variable annuity exposure."

Mr. Guloien said Wednesday that he wants to "offer the highest degree of financial security for our customers.

"These are volatile markets, and Manulife has a certain amount of exposure to equity markets, interest rates and so on. While I tend to be optimistic about markets, we have to be prepared for the worst-case scenario.

Manulife will likely retain the capital from the equity sale at the holding company level "to satisfy the new, and still unknown, capital requirements," said Mario Mendonca, an analyst with Genuity Capital Markets Inc.

"Without any information on the holding company standards, and the results of the [Office of the Superintendent of Financial Institutions]review of the internal models used to determine segregated fund capital requirements, we are not in a position to suggest that MFC's capital issues are behind it," he said in a report to clients. "Additionally, we are also left wondering what exactly changed over the past few months and even weeks," he said.

OSFI supervises banks and federally regulated trust and loan companies.

After management indications that no new equity issues would be needed at the recent price level, "this offering raises concerns that, very recently, something on the capital front has changed (of a regulatory nature) that forced the capital raise," Mr. Mendonca said.

With a file from Reuters