Expecting to suffer its first loss as a public company, Manulife Financial Corp. is reluctantly tapping the market for equity, the second Canadian financial institution to do so in as many weeks because of investor pressure to boost softening capital levels.
Chief executive officer Dominic D’Alessandro said in an interview Tuesday the equity move is “not what I would have preferred to do, but like everybody else, when the facts change maybe it’s an indication you should change your position.”
The move will put Manulife in a position to not be left out of the race for acquisitions as the global life insurance industry goes through a round of consolidation.
Manulife is issuing at least $2.125-billion of common equity to raise its capital levels, which have been walloped because of the company’s large exposure to stock markets.
It now expects to lose $1.5-billion in the fourth quarter, the first time it has not earned a profit since going public in 1999.
On a mid-October conference call, Mr. D’Alessandro told analysts that the insurer remained very well capitalized and “we have no intention to issue equity capital, contrary to speculation that came to our attention.” Instead, Manulife went on to arrange a $3-billion loan from the big banks to bolster its financial cushion.
But stock markets continued to tank, eating away at the large investment portfolio that Manulife holds in its variable annuity and segregated funds business. As those investments sink, Manulife is required to put more money aside as capital. Its shareholders weren’t satisfied.
“We thought the $3-billion facility that we put in place had allayed the concerns that were out there, but it didn’t do the job,” Mr. D’Alessandro said in Tuesday’s interview. “Our stock price kept suffering from weakness and we kept hearing from investors and other people close to the company that maybe we should just bite the bullet and put it behind us because no one knows how long these uncertain times are going to be with us.”
The company would not have changed its tune if it were convinced that this was “a passing storm,” he said. “But it may endure for a while and we don’t want to be in a position where there are all kinds of things happening in our business and we’re on the sidelines.”
Shane Jones, managing director of Canadian equities at Scotia Cassels, which owns Manulife shares, said the company should have taken action sooner. “Now they’ve come to market at the bottom. If they had raised equity a month ago they would have done it at a better price.”
Raising more equity will safeguard the insurer from further declines in stock markets as well as boost Mr. D’Alessandro’s ability to snap up more assets before he leaves his post in May.
Manulife chief investment officer Don Guloien, who will replace Mr. D’Alessandro when he retires next year, has met with bankers to examine parts of American International Group Inc., sources have told The Globe and Mail. Manulife is also believed to be keeping an eye on U.S. rivals whose share prices have been battered by the financial crisis.
Last week, Toronto-Dominion Bank CEO Ed Clark decided to issue $1.4-billion of common equity, days after suggesting he would do no such thing. Like Mr. D’Alessandro, Mr. Clark also said he faced pressure from investors.
The sudden death of massive financial institutions such as Lehman Brothers has caused the market to attach a new importance to capital, which provides firms with a buffer in times of trouble. The capital ratios of all of Canada’s largest banks and insurers have remained well above the minimum levels that regulators require, but that’s no longer good enough.
Mr. D’Alessandro believes that the capital requirements for Canadian life insurers, dictated by the Office of the Superintendent of Financial Institutions, are still too strict. OSFI changed the rules in late October to give Manulife and its rivals more breathing room. But Manulife is still required to put aside large amounts of capital each time stock markets drop.
“Markets go down 10 per cent and you’ve lost 15 points of your elbow room,” Mr. D’Alessandro said.
With the new equity, the insurer’s capital ratio (called the MCCSR, or Minimum Continuing Capital and Surplus Requirements) will be about 235 per cent, one of the highest levels in the company’s history. Manulife aims to keep the ratio between 180 and 200 per cent, and OSFI requires that it remain above 150 per cent.
Manulife will now pay back $1-billion of its bank loan and sell $1.125-billion of equity by way of a private placement to eight existing institutional investors such as the Caisse de dépôt et placement du Québec, the investment arms of big banks including Royal Bank of Canada and Toronto-Dominion Bank, and Jarislowsky Fraser Ltd. A further $1-billion is being sold to the public in a bought deal. The new equity is being issued at $19.40 a share.
MANULIFE (MFC)
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