Archive for 2009

Manulife has received approval to sell insurance in Shantou, a port city in China. While all the attention of late has been on variable annuities sold by Manulife in the U.S. and the strain that has put on the balance sheet, in many ways the future of the firm is in China.

After first receiving permission in 1996 to enter the Chinese market in Shanghai, Manulife has been adding cities at a fast pace. Manulife is now licenced in 38 cities and has more than ten thousand agents.

Most of those cities are huge. Shantou has a population of five million, making it twice the size of Toronto. Of the ten cities in which Manulife was licenced in 2007, for example, eight were bigger than Toronto. The plan is to have 30,000 agents in 100 cities by 2015.

For a Canadian firm to sell financial services in China sure beats shipping our natural resources from here for value added at the other end.

Manulife’s new CEO Donald Guloien has a management style that’s rare. During a recession when most business leaders are trying to squelch pessimism, Guloien is busy promoting something: prudence.
“I think at this stage of the cycle, prudence and conservatism is called for,” Guloien told Bloomberg’s Sean B. Pasternak in an interview. “The prudence our grandmothers had, the prudence farmers have in the Midwest; a little more of that needs to be applied in the executive suite.”
That’s why Guloien cut the Manulife dividend, reduced sales of variable annuities (VAs) and hiked hedging on VAs already sold.
Praise followed. “Don’s most important characteristic for me is that he just seems to be blunt and a straight shooter,” said Mario Mendonca, an analyst at Genuity Capital Markets. “He doesn’t seem to want to sugarcoat anything.”
But wait a minute, couldn’t Mendonca’s comments apply equally to Guloien’s aggressive predecessor, Dominic D’Alessandro, who oversaw fast-paced sales of variable annuities in the U.S. and Canada?
“Variable annuities became too big a part of Manulife’s portfolio, from both a marketing perspective and a risk perspective,” said Guloien. “We’re trying to dial back the risk.”
If backgrounds matter, D’Alessandro knows as much about prudence as Guloien. Raised by his widowed mother in a working-class Montreal neighbourhood, D’Alessandro’s boyhood clothing came from the Salvation Army.
But the tenor of the times changed during D’Alessandro’s final days at the helm. D’Alessandro might not have cut the dividend, but he raised billions in capital and had begun hedging.
Guloien has upped the ante. With familial roots in Saskatchewan, he knows whereof he speaks about the Midwest. After 28 years with Manulife, he also knows the company, although his moves since taking over in May must have surprised many.
They certainly surprised me. I interviewed him twice, once before he was picked to become CEO, and once after. At no time then, nor in his speech to the annual shareholders meeting, did he hint at the restraints to come.
We know now. Grandmothers are in. Long may they reign.

Today marks the tenth anniversary of the first day of trading on the Toronto Stock Exchange when Manulife Financial went public. Since 1999, the company has quadrupled in size, much of it due to the $15 billion takeover of Hancock in 2004. Market cap has gone from $9 billion to $37 billion.

More importantly for shareholders, anyone who was part of the initial public offering, hung on, and reinvested their dividends in shares, has enjoyed compound annual returns of more than 12 per cent. Bernie Madoff had to commit fraud to offer his clients the same!

To celebrate, the company is contributing to planting 75,000 trees in Canada, the United States and Asia. Let’s hope they’re adding them to the firm’s $9 billion global portfolio of timberland so they can be part of ongoing growth.

Here’s the birthday card that went out to every employee. It should win an Oscar for best animated short.

With a fall election in the offing, controversy will soon begin around the televised debates. In the last couple of elections, there has been much to-ing and fro-ing about which party leaders would be included. The television networks have tried to limit the numbers, but there was such a foofarah that they finally relented and all five parties (Conservative, Liberal, NDP, Bloc Quebecois and Green) were represented. The outcome was akin to a schoolyard brawl with too many voices and too little time.

I’d like to go one step further and urge that we not only reduce the number of debate participants, but also eliminate one of the parties: the Bloc. Regional parties are fine. For a while. The Reform Party began as a regional party, so did the Progressives in the 1920s. Both eventually morphed or merged to become national political organizations.

The Progressives took 20 years to peter out. The Bloc is still going strong after 18 years but shows no signs of becoming a national party. Unless the Bloc is prepared to run candidates in all ridings across the country, this should be the Bloc’s last federal election.

As for Elizabeth May and the Green Party, which at least contested all ridings during the last three elections, she shouldn’t be allowed to participate in the debates until the Greens capture at least 10 per cent of the vote. In 2008, the Green Party had 6.8 per cent.

Undemocratic? The Bloc has had plenty of time and millions of dollars in public money to become a national force. At current levels of support, the Greens don’t deserve either public money or debate profile.

Democracy would fare a whole lot better if some party had a chance to win a majority. Parliament would be a less fractious place. Legislators would get more done. Voters would be better served. Otherwise, we become Italy without the good weather.

UPDATE: The wrangling began even more quickly than I imagined. An article in the Sept. 11 Globe and Mail, the day after this post, called for a revamp of the debates.

Harvey Schachter, the Globe and Mail reviewer, started off talking about my book in a positive way, calling it “well-researched and intelligent” but then veered elsewhere saying it lacked drama.

Fortunately, other commentators have praised the book. Joe Martin, Director of Canadian Business History at the Rotman School, has said the chapter on succession “is the best I have ever seen on corporate succession in a Canadian context.” Tom D’Aquino, CEO of the Canadian Council of Chief Executives, said: “This work makes for an important addition to business history in Canada.”

As for drama, I would have thought the first-time telling of Manulife’s failed attempt to merge with CIBC would have satisfied Mr. Schachter. Or the inside details on Dominic D’Alessandro’s valiant efforts last fall to arouse Ottawa’s interest in his plight during the global meltdown. The descriptions of D’Alessandro by his own colleagues (one of them called him “scary”) should have intrigued any reviewer. They certainly were the most honest comments about a CEO I’ve ever heard and recorded in my twelve books over twenty-five years.

But reviewers are a breed apart. They like, they don’t like. Who can predict? Even after all these years, not I.

Amidst all the kerfuffle about Manulife cutting its dividend, one question has gone unasked. But before I get to that, let’s review the proceedings. In a bid to build what he calls a “fortress” company, newly minted Manulife CEO Donald Guloien cut the dividend in half. The step, he said, would raise capital levels and yield $800 million annually for acquisitions.

But capital is already hale and hearty. Manulife’s Minimum Continuing Capital and Surplus Requirements (MCCSR) must now be at 250, a historic high, and well above the regulator’s required 150. When Michael Lee-Chin recently sold the rest of his AIC funds to Manulife, he took shares. No cash required.

To be sure, some investors applauded the move. Stephen Jarislowsky, the Montreal money manager who is the third largest shareholder in Manulife, says he’s buying more at these prices because share price will double in the next two years.

Of course, the step to slash the dividend is also all about Guloien distancing himself from the previous office-holder’s activities. Mario Mendonca, an analyst with Genuity Capital Markets, has described former CEO Dominic D’Alessandro’s management style as the “swing for the fences” variety. Guloien seems satisfied to lay down a sacrifice bunt.

So here’s the unasked question: why are shareholders being asked to pay the piper with this cut in dividends? As Winston Churchill famously said when the electorate threw him out of office after his successful leadership during the Second World War, “If this is a blessing in disguise, it is very well disguised indeed.”

Tara Perkins, the financial services beat reporter for the Globe’s Report on Business, seems like an insightful writer. As someone who has written about the topic for thirty years, I can recognize a good journalist over a mediocre one. It’s just that Ms. Perkins doesn’t read books. Or studiously avoids citing books in her field.

Take today’s fine piece on Donald Guloien and his conservative stance at Manulife. She quotes the new Manulife CEO on the topic of last fall’s market meltdown as saying, “Those were very uncomfortable times.” I guess they were. Fine old firms crashed: American International Group, Bear Stearns and Lehman Brothers. The entire global financial system almost blew apart. She also quotes Guloien as saying Manulife’s response in raising capital by taking out bank debt and issuing shares was “very humbling.”

Ms. Perkins went to all the trouble of making an Access to Information request and got some documents about efforts by former Manulife CEO Dominic D’Alessandro to get Ottawa’s help. I wasn’t surprised that the best stuff was blacked out; there are people in Ottawa who do nothing but blackouts.

But there was plenty of public information on this very question that was much closer at hand: my book about Manulife, published in May. As Casey Stengel used to say, “You can look it up.” On pages 231-235, I give chapter and verse on D’Alessandro’s lobbying efforts with Superintendent of Insurance Julie Dickson as well as Finance Minister Jim Flaherty and Rob Wright, his deputy minister.

Ms. Perkins notes that D’Alessandro met with Prime Minister Stephen Harper on November 6 to discuss “financial institutions.” She goes on to say that it’s not known what was discussed. Well, I can tell you what was not discussed: relief for Manulife. I know that because I put the question to D’Alessandro during my research and he said, “I did not go to the prime minister. I spoke to the finance minister, the deputy finance minister. I spoke to some other people. I explained the issue. They were very sympathetic but to interfere and give direction to the superintendent at a time like this was not something they wanted to do.”

There are other details in the book that could have been usefully added by Ms. Perkins to today’s piece but weren’t. I don’t know why she didn’t get in touch with me or quote my book. On major stories like this, reporters usually want to ferret out and provide readers with information from all knowledgeable sources.

I think I’ll try the oldest technique in journalism, I’ll phone her this morning and ask why her research was so narrow. I’ll keep you posted.

UPDATE: Ms. Perkins seemed surprised to learn she could quote from my book. “I didn’t know you’d be open to that,” she said. Open to that? The book, after all, is in the public domain. Authors appreciate such mentions, with appropriate citations, of course. “It just didn’t occur to me,” she said. An answer so naive it must be true.

Steven Proctor, business editor of the Halifax Chronicle-Herald, has reviewed my new book, calling it “straightforward [and] easy-to-read.” The review also noted: “The book is notable because it actually broke some news, an unusual circumstance for a biography.”

Halifax, of course was for decades home to Maritime Life, bought by John Hancock in 1969. Hancock was in turn acquired by Manulife in 2004. Proctor’s office is in what is still called the Maritime Life building.

Here’s a link to the full review.

Since the announcement last Friday by Manulife that the company was being investigated by the Ontario Securities Commission, share price has fallen a whopping 15 per cent. According to Mario Mendonca, of Genuity Capital, that makes Manulife cheap. “We see significant upside in the stock at current levels,” said Mendoca in a report issued before the markets opened Wednesday.

Mendonca, who was among the noisy analysts last fall urging Manulife to raise more capital, says if the S&P falls to the 700-750 level, the company would have to issue more common equity, something I’m sure CEO Donald Guloien would be loathe to do. (The S&P is currently at 900.)

Meanwhile, Mendonca has lowered his target price on Manulife from $27 a share to $25, a cautious approach given his positive view. Markets this morning opened slightly higher ahead of the Federal Reserve meeting with Manulife up 28 cents a share in the first few minutes at $20.52.

(Declaration: I hold MFC and have done so since prior to beginning my research on the book early in 2008. With the exception of dividend reinvestment, I conducted no trades in the stock.)

UPDATE: A week later, Mendonca downgraded Manulife to a HOLD, the same as saying: sell. Mendonca said that Manulife’s message was so “nuanced” (translation: confusing) he had no choice but to reverse his field. With no new information issued by the company, the analyst’s conclusion was unusual to say the least. But it wasn’t nuanced; it was a clear 180-degree turn.

Newly appointed CEO Donald Guloien continues to put his stamp on Manulife with the appointment of Michael Bell as Chief Financial Officer. Bell held a similar role for the last six years at Cigna Corp., a Fortune 200 provider of employer-sponsored health, accident and disability insurance. Bell replaces Peter Rubenovitch, one of Dominic D’Alessandro’s earliest hires in 1995.

When D’Alessandro arrived as CEO in 1994, he didn’t like a lot of what he saw in the executive ranks, and set out to replace most of the senior officers. Guloien doesn’t have that issue, but he will be presented with opportunities such as is the case with Rubenovitch who is retiring.

Just as well. Every new CEO needs his or her own people in place. It’s not that the predecessor had the wrong people, or that loyalties can’t be transferred, it’s normal human nature to want your own team. With David Paterson newly ensconced in public affairs, this is Guloien’s second appointment in a month.

Meanwhile, Guloien is also making capital strength a first priority. Even though the regulatory-mandated Minimum Continuing Capital and Surplus Requirements (MCCSR) are “near the highest levels in our history,” according to Guloien, he wants an even higher number. “We will embark on a plan to increase capital to fortress levels,” Guloien said in a statement. Moreover, to do so, he wants to avoid issuing more shares, and that’s good news for current shareholders who don’t want the value of their holdings diluted.

In other developments, the Ontario Securities Commission has told Manulife it has come to the preliminary conclusion that the company failed to disclose, on a timely basis, information about the sale of its guaranteed investment products. On the face of it, such inaction by Manulife seems unlikely, and indeed, the company says it was up-to-date with all filings. The OSC will be investigating further. Stay tuned.