Manulife Faces Lawsuits

Recently, a number of lawsuits have been filed against Manulife Financial Corporation (NYSE:MFC). Manulife and some of its executive officers are being charged for violation of federal securities laws.

The lawsuits, filed on behalf of the purchasers of Manulife securities between March 28, 2008 and June 22, 2009, are about Manulife’s segregated fund contracts business. Segregated fund contracts that offer death benefits and maturity guarantees.

On June 19, 2009, MFC disclosed that it has received an enforcement notice from the staff of the Ontario Securities Commission (OSC) regarding its disclosure before March 2009 of risks related to its variable annuity guarantee and segregated funds business. Manulife has been accused of making false and misleading statements regarding its ability to manage and control risk in the segregated fund contracts business.

According to the allegations, Manulife had built a huge stock portfolio that it did not hedge. This had resulted in a massive decline in the funds available to guaranty the segregated fund contracts obligations, thereby compelling the company to raise billions in capital.

On February 12, 2009, Manulife exposed that its reserves for the segregated fund contracts had to be increased to an astounding $5.7 billion for the period ending December 31, 2008, from $526 million as of December 31, 2007. As a result, the company’s shares shot down from $15.25 on February 11, 2009, to $9.87 on February 23, 2009.

An OSC notice says that the OSC staff has preliminary concluded that the company has failed to meet its disclosure obligations associated with the exposure to market price risk in its segregated funds and variable annuity guaranteed products. However, the company has the opportunity to respond to the notice before the OSC staff decides whether to commence proceedings or not.

In response to the OSC announcement, Manulife shares slid 12% to close at $17.67 on an abnormally high trading volume of almost 8 million shares.

Manulife has recently boosted its regulatory capital by raising C$450 million through a new preferred share issue and by entering into a reinsurance agreement to cede certain Canadian Group Benefits related exposures. On July 10, the company completed its $1 billion offering of Manulife Financial Capital Trust II Notes - Series 1, due December 31, 2108.

In addition, Manulife has also enhanced its Canadian Dividend Reinvestment Program and introduced a new dividend reinvestment program for the US shareholders that replaced its US Investor Services program. During the second half of 2008, the company enhanced its capital position with a C$2.0 billion term loan and C$2.3 billion equity issue.

Companies such as Manulife Financial, Principal Financial Group (NYSE:PFG) and Lincoln Financial Group (NYSE:LNC) have been adversely impacted by the severe equity market downturn. In particular, the variable annuity businesses of these companies have been worst hit. Principal Financial Group and Lincoln Financial Group have also resorted to similar public offerings to bolster their capital levels.

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