Friday, June 19, 2009

Income Plus. Disclosure Minus. Flaherty's favoured corp, favoured investment product gets enforcement notice



Manulife gets enforcement notice

Tara Perkins
Globe and Mail Update,
Friday, Jun. 19, 2009 06:25PM EDT

Manulife Financial Corp. (MFC-T23.250.200.87%) says it has received an enforcement notice from regulators who believe the company failed to make proper disclosures concerning certain exposures.

The insurer also said that its chief financial officer is retiring.

In a news release issued late on Friday, Manulife said that staff of the Ontario Securities Commission sent it a notice this week relating to the information it disclosed about its variable annuity and segregated funds business before March of this year.

Manulife says it believes that its disclosure met all of the requirements, but the preliminary conclusion of OSC staff is that the company failed to meet its continuous disclosure obligations related to its stock market exposure.

The market exposure stems from the company's large variable annuity and segregated funds business. The products are like private pension plans for individual investors. Manulife takes a customer's money, invests it, and promises payments down the road. When markets drop, it must build up capital and reserves to protect against any shortfall in the amount it has promised to pay customers in the future.

The company will now have the opportunity to respond to the OSC's notice before the regulator's staff decides whether to start proceedings. Manulife said it intends to co-operate with the OSC.

In a separate statement that the company characterized as unrelated, Manulife said that chief financial officer Peter Rubenovitch is retiring after 14 years, and will be replaced by Michael Bell, who has been the chief financial officer of Cigna Corp. (CI-N25.241.586.68%) for the past six years.

3 comments:

Dr Mike said...

Ouch --that`s gotta sting.

I feel terrible , not.

Dr Mike

Anonymous said...

Brent,
In my days as a broker I declined to sell these types of products fearing there was too much counterparty risk. I have had brokers cancel my research service because I was critical of these types of products.

The icing on the cake is the timing of the trust tax legislation and the timing of the Manulife's Income Plus product as you are too well aware.

Do you think the OSC has a case or the guts to stay on this? Maybe they are acting on complaints from investors?

This is a very interesting development

Harry

CAITI said...

Harry:

It is good that the OSC is looking at this and the the head of OSFI had cautionary comments for the industry on this product line, however that’s not what’s needed here. The regulators can only regulate in the context of the legislation that they regulate. The life insurance industry has infected their main line business with the risks taken these types of new activities.....that Warren Buffett calls “crazy”. What would he say about those that Manulife that didn’t even bother to hedge? This is an issue that should be pursued by the lawmakers in Ottawa and the rules should be written to avoid these new systemix risks and curtail what the lifecos are doing. I was on to this back on February 1 of 2007 with comments like this, in an email entitled Questions for Mr Manulife, that preceded Dominic’s testimony

“What is the capacity of the Canadian banking system to provide you with swap arrangements that enable Manulife to offload the risk associated with this [type of variable rate annuity] product? Is this a profitable line of business for the banks? Whose credit risk are your investors exposed to? Yours or somebody else’s? Where is this disclosed in your advertising? How do you provide your Income Plus investors with on-going reporting of this shifting risk aspect of your product over time?”

Also, after Dominic testified on February 1, 2007 at the Public Hearings , where he was making a big deal about the importance of the corporate model and retaining capital and having access to capital, I responded by asking the question:

“Are you saying that your capital adequacy ratios are insufficient and need to be raised to better protect your policyholders”?

I guess the answer to that became self evident over time. So what's Ottawa doing about it?

Oh yeah, a Blue Ribbon Task Force on EI.

Out to lunch, as usual.

Brent