Manulife CEO Donald GuloienMIKE CASSESE
Manulife Financial Corp. chief executive officer Donald Guloien has done what he described three months ago as "the last thing we want to do."
In a swift reversal, Mr. Guloien stunned investors late Wednesday with a decision to raise at least $2.5-billion in common equity, in yet another bid to boost Manulife's capital levels. The company's financial cushion is now significantly bigger than regulators require.
The move shows that 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. It also signals that Mr. Guloien is still willing to anger Manulife's shareholders with a dilutive equity offering as he pursues his goal of raising the company's capital to "fortress levels."
This is the second time in less than a year that Manulife has gone hat-in-hand to 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.
At the time, Mr. Guloien said that a large part of the rationale for the dividend cut was that he didn't want to find himself in a position where he had to raise common equity.
"We have talked before about avoiding the risk of a dilutive equity offering," he told analysts on a conference call in August. "I thought it was very humbling to raise equity at $19.60 [a share]because I don't believe Manulife is a stock that should be valued at $19.60 back in December. It is the last thing we want to do."
Manulife's shares are being sold in a bought deal at $19 apiece. Under such an arrangement, brokerages buy the shares and resell them to investors. The insurer's stock closed at $20.18, up 18 cents, before yesterday's announcement.
In an interview, Mr. Guloien explained why he says he's changed his mind about raising equity. "What's changed is, I think, the attitude of regulators and rating agencies is towards more capital, not less," he said. "I guess I predicted that there would be pressure in that direction, but it's growing. The second thing is the [acquisition]opportunities are coming to us faster than I would have predicted."
Since becoming chief executive officer, Mr. Guloien has often said that 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.
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.
"The other thing is we are seeing very, very attractive [takeover]opportunities, and we want to be in a position to take advantage of those in an efficient and firm manner," he added. "We obviously have the resources to execute small and medium-sized deals from our own resources, but if we were to pursue a number of deals [then]that would add up to a bigger number, and we think it's that kind of market where there will be multiple opportunities presented to us that we would like to take advantage of."
Manulife said it plans to use $1-billion of the money to pay back an outstanding loan it has from the big banks (which it took out in November, 2008, in yet another bid to shore up capital levels).
Some analysts aren't putting much weight in the idea that Manulife wants these funds for acquisitions. "I don't believe this is for a deal," said Genuity Capital Markets analyst Mario Mendonca.
"You wouldn't do a deal not knowing what the holding company standards are," he said, referring to one of the many requirements that regulators and rating agencies are still working on in the wake of the financial crisis.
Mr. Guloien said that until Manulife deploys the money it will have excess capital that will be "very satisfactory" to rating agencies and regulators.
"I think this is the kind of market where stability and strength are going to be rewarded," he said.
Andrew Willis