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Manulife CEO defiant in face of downgrade threats

Louie Palu/The Globe and Mail

Credit rating agencies are circling Manulife , but Don Guloien is defiant. And investors appear to be on his side.

The chief executive officer of Manulife reported Thursday that the insurer has cut its exposure to interest rates, stock market gyrations and risky products, posting quarterly results that sent the stock up sharply.

Still, Standard & Poor's threatened to downgrade the insurer's credit rating for the second time in three months, sparking an aggressive response from Mr. Guloien. Moody's followed with an actual downgrade.

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The insurer reported a third-quarter loss of almost $1-billion, but that was a smaller bleed than expected and included hits that Mr. Guloien described as painful but necessary.

Manulife took a $1-billion goodwill impairment charge on its U.S. business, and a charge of slightly more than $2-billion stemming from updates it made to its actuarial methods and assumptions. The company's adjusted earnings from operations were $779-million after factoring out unusual items.

S&P said it is considering downgrading Manulife's credit rating yet again, indicating it's too early to call a turning point and forcing Mr. Guloien to remain on the hot seat as he works to demonstrate that he can remove risk from the company and get it back on a path to stable growth.

Later in the day, Moody's Investors Service downgraded Manulife, to A1 from Aa3, following the quarterly loss.

In S&P's decision to put Manulife back under the microscope, the agency suggested it's possible that the quality of some of Manulife's U.S. businesses are not as strong as the rating agency had believed. It also pointed to Manulife's disclosure that it might record a further $2.2-billion goodwill impairment when new accounting rules kick in next year.

"We believe Manulife exhibits a larger-than-average strategic risk appetite," said S&P, which stripped Manulife of its coveted triple-A status last year, and this August lowered it further, to AA from AA+. It intends to make its latest decision on the insurer's rating within a few weeks.

Mr. Guloien said the company will talk to the rating agency, but also lashed out at its decision and said he's confident that the insurer's strategy is the right one.

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The charge that the company took with respect to its U.S. business is a direct reflection of the economy, and the "substantial" repositioning that Manulife has taken to reduce the risks in that business, he said.

"That repositioning is painful in terms of writing off goodwill, but it's a positive repositioning for the business going forward," Mr. Guloien told analysts on a conference call.

"I spent a lot of my life rating credits, and I would give a credit improvement for that, not a credit downgrade," added the CEO, who began his career at Manulife in 1981 as a research analyst and rose to become its chief investment officer.

Manulife has been reducing benefits and raising prices on riskier products such as variable annuities, letting sales slide in order to cut its future exposures. It sold $1.3-billion of variable annuities in the quarter, down 30 per cent from the prior year. It also intends to raise rates significantly in its U.S. long term care business.

Mr. Guloien signalled he intends to stick to the path that Manulife is on, and is confident that it will deliver bottom-line results.

"We don't manage our company for the quarter-to-quarter earnings, the quarter-to-quarter stock price, or the quarter-to-quarter ratings," he said.

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"Lots of people are entitled to their opinions, but we're going to run it for the long term, in keeping with our strategic plan. We're doing the right stuff, and again, the actions that we are taking that give rise to that goodwill writeoff that is alarming to people - you know, it's $1-billion, I don't like that number - but the actions that we're taking that give rise to that are actions to reduce risk, to produce more stable earnings at a higher ROE for the long-term of the business. And it's not a pipe dream ...The results are coming in this quarter."

The key measure of Manulife's capital levels, called the minimum continuing capital and surplus requirements or MCCSR ratio, rose 13 percentage points during the quarter to end at 234 per cent. Capital levels were boosted by the company's decision to raise $2-billion in debt.

The market keeps a close eye on Manulife's capital levels, which were sent on a roller coaster ride during the financial crisis because of equity exposure stemming from its variable annuity business.

The company has raised nearly $5-billion in equity since the crisis began to bolster its capital base. Mr. Guloien told analysts Thursday that Manulife has no intention to raise equity again even if S&P downgrades its rating. He noted that Manulife's current headaches stemming from low interest rates will be over once interest rates rebound, something that he said must happen if the global economy recovers its health.

"We've gone through a challenging time, but we're doing all the right things to produce big growth in shareholder value," he said in an interview.

But he suggested it's too early to call the turning point yet.

"As good a day as it is, I don't measure progress by a one-day movement in the stock price."

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