Now about that payment reminder, Manulife

It was inevitable. What to do about my insurance?

Each Fall, I get a series of polite notices from my insurers at Manulife, reminding me that my Family Term payments are due. Like any responsible, self-employed father with an admiration for George Bailey, I’m worth more dead than alive.

This payment cycle forces a moment of particular reflection. Not that I don’t need the insurance. But am I safe to stay with Manulife (MFC:TSX)? Just today, MFC shares rose 5.56% on the simple news that the Dow Jones closed handily above the 10,000 mark. It seems that momentum traders trade Manulife as though it is one of those double-leveraged ETFs that either climbs twice as fast, or drops twice as far, as the overall market.

Odd for a 120 year old insurance company, but that’s Manulife’s unfortunate lot these days.

According to its website, Manulife is “Strong”. Definitely something that I was counting on 9 years ago when I started to collect their policies. But is it? The stock quote tells me otherwise, but that’s old news of course.

Just last quarter, the net loss amounted to $2.4 billion. Mark-to-market accounting may have been the culprit there, and its not that we weren’t warned of this reality by former Manulife CEO Dominic D’Alessandro (see prior post “D’Alessandro: fair market value accounting is ‘perverse”” Sept 30-08). That $2.4 billion was a bit more than the $2 billion in new equity that CEO Donald A. Guloien recently added with the promise/justification that Manulife needed a “fortress” balance sheet.

Reminds me of how quickly Citibank eviscerated the capital they raised from ADIA in 2008.

Not that we needed to be reminded how quickly things can change, but boy, how quickly things can change. It was less that two years ago that Manulife was putting capital up to help keep long-standing quarry CIBC out of the ditch (see prior post “CIBC offering rumours prove true” Jan 14-08). And I was ruminating about how easy it would be for Dominic to swallow the bank whole, since Manulife was sporting a market cap. that was 3x CIBC’s in December 2007 (see prior post “Will Manulife come to CIBC’s rescue?” Dec 19-07). Today, CIBC’s market cap. is 30% higher than Manulife’s. Talk about missing the boat.

With $27.804 billion of shareholders’ equity as at June 30th, my stewards on Bloor Street can lose $2.4 billion for a few more quarters to come before things start to look bleak at Manulife. Mind you, if interest rates drop further, and the Dow has a hard time staying above 10,000, these quarterly $9.599 billion increases in actuarial liabilities could become regular appearances.

I can’t say I fully understand how this is all the new CEOs fault, however. He was, of course, CFO prior to his promotion. One of the reasons why I’ve always been a fan of Dominic’s (see prior post “Which public company CEO do you trust?” Sept 25-08) was that he seemed so closely associated with the daily cut and thrust of Manulife’s buisness. And now, I hear that that libelist TT has a story in the National Pest about how Dominic can’t believe how things have turned so badly, so quickly. Weren’t, one must ask, these invasive policies written some years ago? Liabilities that University Avenue-based actuaries might say could not have been laid off, and therefore weren’t appropriate for an insurance company to take on in the first place?

If things get worse for MFC, the window might just open for RBC CEO Gord Nixon. As much fun as he may be having doing a life insurance start-up, would he not rather start with a sales force of 45,000 in 22 countries? Absolutely.

I know that current federal law prohibits a merger of RBC and Manulife, but I doubt that Finance Minister Jim Flaherty would rather that AXA or Allianz buy it. Minister Flaherty undoubtedly appreciates that Manulife is two or three bad quarters away from needing to do something big. Right?!?

And if you know anything about Canadian bank CEOs, they don’t buy distressed assets of any chunky size. Finance Dept.’s public servants certainly can’t expect RBC to wait ’till Manulife is on its heels before they make their move. RBC’s shareholders wouldn’t go for it at that point. Ironically, it is only a stable Manulife that is a viable merger partner for a made-in-Canada solution.

Which brings me back to my payment reminder. I’m cutting the cheque tomorrow on the basis that, either way, things will be fine. I hope and expect Manulife’s deep management team to work things out for the comfort of their customers and shareholders. And, if market forces make that increasingly impossible, I’m fully expecting Minister Flaherty to recommend to the PM that the “Seven Independent Pillars” strategy will have to be amended in the blink of an eye.

Let’s not repeat the Confederation Life debacle.

MRM
(disclosure – we own RY in our household; this post – like all blogs – is an Opinion piece)