Manulife head office in Toronto
The Street is concerned that Manulife might have to raise common equity capital yet again, but CIBC analyst Rob Sedran sees a potential alternative: regulatory forbearance.
Manulife's disappointing second-quarter results have raised fears that the billions of dollars in capital that the insurer has already raised by tapping the market for common equity - and preserved, by cutting its dividend - aren't enough. It's not so much the magnitude of the $2.4-billion quarterly loss that has investors concerned; rather, the results showed that Manulife has become even more sensitive to interest rates and stock markets, and that the key measure of its capital levels (known as the MCCSR ratio) declined to 221 per cent from 250 per cent, Mr. Sedran pointed out in a note to clients Wednesday. (That's still well above the minimum requirement of 150 per cent, but both the market and regulators expect more than the minimum these days).
"After two equity raises and a 50 per cent dividend cut since late 2008, there should be legitimate concern about the market's appetite for a new issue, especially given the precipitous decline in the shares since the last deal," Mr. Sedran added. Shares were issued at $19 on Nov. 18, 2009. Manulife stock was trading at $13.20 Wednesday morning.
One possible solution, Mr. Sedran says, is for the Office of the Superintendent of Financial Institutions to relax its requirements and allow some short-term breathing room on capital requirements.
The fact that Manulife CEO Don Guloien has taken pains recently to point out the difference in Manulife's financial position when it's measured under U.S. accounting rules rather than Canadian rules (under U.S. GAAP, Manulife would have booked a small profit in the quarter - amounting to a variance of about $2.5-billion between the two sets of rules) might be part of a campaign to show OSFI that its rules are overly punitive in the short term, even if they're the best thing for the industry in the long-run, Mr. Sedran suggests.
Such a decision by the regulator wouldn't be without precedent. In the early 1930s, more than 40 per cent of Sun Life's assets were common stocks. The insurer could have been in hot water were it not for a decision by regulators to allow a more generous interpretation of market values when marking assets to market, Mr. Sedran says. "As a result, the company survived a terrible operating environment throughout the Depression."