Sunday, November 13, 2011

(No.177) Manulife jabberwocky

In an Oct.1, 2011 column ["Manulife myth vs Sun Life reality" on (No.173)] I commented on several matters related to Sun Life and Manulife including the role of retiring CEO Don Stewart as well as the disparity in the perception and treatment over time by the media of the companies' respective performances.

On Oct.17 Sun Life announced, ahead of the official release of its 3rd quarter results on Nov. 2, that it anticipated a loss for the quarter. It is worth noting the context established subsequently by the respective 3rd qtr 2011 results reported at the beginning of November by Sun Life and Manulife:

1. Sun Life: an operating loss of $572 million compared with operating net income of $403 million in Q3 2010;

2. Manulife: a loss of $1.28 billion compared with a loss of $2.25 billion in Q3 2010.

It is worth noting that Manulife CEO Donald Guloien served at the right hand of his predecessor Dominic D'Alessandro during a management regime, one which appeared at times to operate within a self-constructed reality, which exposed Manulife to the massive unhedged financial risk which is still hammering the company. In announcing Manulife's 3rd quarter results Guloien declared that " we are pleased [sic] that our hedging program worked during these volatile markets, eliminating the majority but not all of the risk. It gives us the resolve to extend our hedging program further ...."

Let's translate Guloien's doublespeak:

'Manulife, which ceased in 2004 to hedge the massive financial risk to the company of the $billions of guaranteed variable annuities it was selling (the effect of not hedging was to inflate profits and senior management compensation) has -- since Manu went into a financial ditch -- been trying to find the money to belatedly hedge as much of this in force risk as we can afford to do. Because we are continuing to have the financial crap kicked out of us we have to keep working toward a level of hedging protection related to that risky business which Sun Life never stopped maintaining.'

Not content with his corporate spin CEO Guloien goes on to point out how much more Manulife, a Canadian company, would have had in third quarter earnings under a U.S. regulatory regime than its Canadian one. Indeed he argues that "regulatory risk is the biggest risk to our [Canadian life insurance] industry."

Oh what a shame for poor Manulife! What codswallop.

Manulife shareholders and policyholders would have been the parties to deserve one's sympathy even more than they already do had Manulife senior management (who were happy to roll dice in Canada) been subject instead to the oh so desirable sort of 'freedom and flexibility' of a U.S. financial regulatory regime which both allowed and encouraged the 2007-2008 financial crisis. It is a regime which can now be clearly seen to be one of the inevitable outcomes of the cloud-cuckoo-land Wall Street had become -- and to a significant extent still is.

To the extent that Canadian life insurance companies will be required to maintain higher capital ratios than heretofore, so much the better for their policyholders. And the senior managements of Canadian companies would do well to spare the public their pissing and moaning (via the financial media) about the hardship imposed by mark-to-market valuations.

Security of their money, not obscene levels of executive compensation rewarding incompetent or at best mediocre management, is what informed policyholders will support. So will political interest, all the more so because of the political bows still being taken in Canada for the 'safety and superiority' of Canadian financial services during the international financial crisis.

(I will turn to the subject of Sun Life's third quarter results in a future column.)

by Alastair Rickard



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