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Manulife Financial CEO Guloien speaks at the annual meeting in Toronto. (Mark Blinch/Reuters/Mark Blinch/Reuters)
Manulife Financial CEO Guloien speaks at the annual meeting in Toronto. (Mark Blinch/Reuters/Mark Blinch/Reuters)

Derek DeCloet

Manulife, the markets and the hottest seat on Bay St. Add to ...

Our task here today is to explain, in layman's terms, the tribulations of one Donald A. Guloien.

Outside of Bay Street, he remains largely unknown, even though he occupies one of the most important posts in Canadian business. There's a reason for that anonymity. The Guloien narrative isn't one of great entrepreneurial drive (Jimmy Pattison) or of a radical mid-career shift (TD's Ed Clark) or inventing a world-changing device (the boys from RIM). It's about a man who graduated from the University of Toronto, took a low-level job at an insurance company and 28 years later found himself running the place, and they don't write movie scripts about guys like that.

The company in question is Manulife Financial, which managed to shake up the summer news doldrums by recording a loss of $2.4-billion, a record for a firm that has set all kinds of new, unhappy milestones lately. When Jim Flaherty and others boast that Canada's financial system got through the crisis and recession without a scratch, they're ignoring that one of the largest financial institutions was nearly crippled. This week's shock tells us that it's still more troubled than we knew.

For the thousands of investors who bought Manulife's stock believing that it was the bluest of blue-chips, that's a problem. For Mr. Guloien, it means he's now sitting on the hottest seat in Corporate Canada.

Some are sympathetic to him. Others want to tar-and-feather him (what kind of CEO discloses a $2.4-billion loss without any kind of warning of what's coming?).

But his biggest problem? He's handcuffed by the mistakes of the past, and there might be little he can do about it.

Insurance is a curious business. The details of it are highly complex, involving (in Manulife's case) the management of hundreds of billions of dollars in bonds and stocks and real estate and derivatives that will eventually pay the millions of customers from Manila to Boston to Whitehorse who've bought thousands of different products. Then there's the work the actuaries do - estimating how long customers will live and how many will be stricken by cancer or suffer some horrible disfiguring accident. The accounting rules are so complicated it makes your head hurt.

Yet when you boil it all down, insurance is also simple. The customer pays money in return for a promise. That promise might be to pay her spouse a bunch of money when she dies, or to provide her with retirement funds, or to pay her dentist to fill her cavities. But in the end it's all the same.

The trick is to charge the customer enough to be able to pay that promise and still make a decent profit. The very structure also makes insurance a dangerous game: in how many other businesses do you get a pile of cash up front for a product you don't have to deliver for years, decades, perhaps not at all? It's tempting to promise too much, or charge too little, to get the money in the door.

And that's what Manulife did, more or less. The biggest fumble involved variable annuities and similar products that guaranteed customers a minimum income, but also promised upside if stock markets went up. Plenty of other insurance companies also promoted these, but few with the gusto of Manulife. Sales went crazy, and the company now has $100-billion or so of such guarantees on its books.

So every time the market swings down, Manulife's liability gets bigger, and the market swung down in the second quarter, which is how it lost $2.4-billion in the space of three months. When the market goes up, of course, the company might well make $2.4-billion just as quickly.

But here's the trouble for Manulife, and for Mr. Guloien: investors don't pay a premium to buy shares in companies that go from apparently-catastrophic losses one day to Brobdingnagian profits the next. They pay up for the ones with predictably-rising profits, companies that don't require them to buy Pepto-Bismol by the case - like Manulife once was when Dominic D'Alessandro was in charge and everything looked fine on the surface, even though it wasn't, even though the salesmen were running wild.

Back then, the company ran neck-and-neck with the Royal Bank of Canada for the title of largest financial institution in Canada. Now RBC is worth three times as much and Manulife's stock market value is below its net worth. How can Mr. Guloien fix this? He can pay someone else to take some of those guarantees off Manulife's hands (thought it would cost a fortune). He can hope for more favourable markets (though then the whole company would be at risk if there's another market crash). He can do some of both (that's what he has been doing). What he can't do is find an easy or inexpensive answer, because in the insurance business, a promise is a promise.

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