How far has Manulife fallen? Far enough that people have begun referring to the company's power in the past tense.
"These guys had the potential to be a Canadian global champion," says one investor at a Bay Street firm who was a supporter for years, but is now dumping the last of his Manulife shares. "It's too bad."
Had the potential? That stings. Particularly when Dominic D'Alessandro, the soon-to-retire chief, has staked his legacy on creating a world-beating financial business from Toronto. Manulife is bidding on some of the Asian units of its dismembered former rival, AIG. But it will take a lot more than spending a billion or three in Japan or the Philippines to mask a $35-billion decline in value, which is how much the company's market capitalization has shrunk since Sept. 15.
We chose that date because it was the morning that Lehman Brothers went bankrupt and the unofficial start of the most serious stage of the financial crisis. You may recall the panic that ensued. Equity markets in New York and Toronto each tumbled more than 500 points, General Electric was smashed, Citigroup plummeted.
Manulife's stock fell all of 1 per cent that day. It was a safe haven, unsinkable. But that was before anyone had a clue to how bad the markets would get or how much equity risk Manulife had buried in its books.
Here's what we know now: That Manulife sold contracts to investors that promised guaranteed investment returns, did not hedge the risk (as other insurers had done), and is thus on the hook - on paper - for a liability that's some $30-billion and gets a little bit bigger every time the market falls again. That's why its safe-haven status has not only been stripped away, but reversed. Now, when the Dow falls 5 per cent, Manulife's as likely as not to drop 9 or 10 per cent.
The big worry is that as the liability grows, Manulife will come scurrying back to raise a lot more equity, diluting its stock again after raising $2.1-billion before Christmas. So it was not a massive surprise to hear Mr. D'Alessandro yesterday declare that, unless Manulife makes an acquisition, it doesn't plan to sell more shares.
The magic effects of that statement of confidence lasted about an hour. Then the stock went right back to tumbling to yet another new low. Now trading at three-quarters of its balance sheet net worth, and yielding 8.3 per cent, Manulife has gone from looking like a global winner to just another stressed financial institution. No wonder Mr. D'Alessandro doesn't want to issue shares - to do so feels like selling at the point of maximum pessimism. So let's examine his options.
Start with the good news: Manulife's an insurance company so there's not going to be a "run on the bank." It still has a triple-A credit rating. There is no risk of a Lehman-style cash crunch. That $30-billion doesn't have to paid out until many years from now, if it has to be paid out at all. The markets could recover.
What Manulife has is not a liquidity problem but a regulatory problem, says Mario Mendonca, Genuity Capital's insurance analyst. Every 1-per-cent decline in the stock market knocks down Manulife's key capital ratio (called the MCCSR) by two points. That means if the markets fall another 10 per cent - who would bet against it, since every major index is already down 15 to 20 per cent this year? - Manulife's ratio will likely drop to about 180 per cent. That's the point at which the regulator, the Office of the Superintendent of Financial Institutions, begins to get concerned. (At 150 per cent, they intervene.)
Can Mr. D'Alessandro go back to Ottawa and argue the capital rules are too strict? It worked last fall, giving Manulife some breathing room. But one doubts that OSFI will want to be seen as kowtowing to the industry.
Can he get Warren Buffett or someone else to take on some of Manulife's potential liability for a fee? Only at a usurious price. It's like a homeowner in New Orleans who tries to get flood insurance just as a hurricane bears down on the city. Usually the only entity willing to take on such a risk is the government. Might Ottawa be willing to act as Manulife's reinsurer, Mr. Mendonca wonders? But do the Tories want to cross that particular line?
That's why, as the markets keep falling, all signs point to another equity sale, acquisition or not. But Mr. D'Alessandro could actually turn the situation into a public relations victory. He's leaving anyway. He could raise the billions, dilute the shareholders, tell them he's very sorry but he had to do it, and hand things over to his successor, Donald Guloien - much in the same way Charles Baillie took the hit in 2002 so that he could leave a clean slate for Ed Clark when Toronto-Dominion Bank got in some trouble.
Our anonymous investor is wrong. Manulife can still be a global champion. But first it has to convince the market that it's not in denial about its problems.