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Betting on US economy

There are two questions a buyer of almost anything should be able to answer: Exactly what did you purchase, and what kind of a price did you pay? Manulife Financial Corp., owner-to-be of John Hancock Financial Services Inc., should be pleased to go through this exercise. It was a buyer in a buyer's market.

But investors, who drove the price of both stocks down yesterday, didn't seem very enthusiastic. Several mutual fund managers and analysts I talked with reinforced that impression. Call it a lukewarm reception.

That's a fair reaction, based on stock prices and business conditions for insurance companies as they exist today. A few years into the future, Manulife should look back on this week as the time it took advantage of a golden opportunity.

Manulife agreed to buy Hancock at a price equal to about 1.6 times book value and 10.5 times the earnings forecast for next year. Those figures are higher than the life insurance industry average, but not a lot higher. Jefferson-Pilot Corp., a smaller competitor, traded at 1.6 times its book value in the normal course of business yesterday.

A few years ago, many people who followed Hancock believed a sale of the company might command a price between two and three times book value. At its peak, Hancock shares traded well above two times book value. But in those days, the stock market was much higher, and the credit quality of corporate bond issuers remained strong.

That would have been a seller's market, if Hancock and most other recently demutualized insurance companies had not been prohibited by law from selling at the time. Those times have changed.

Investors who are not Hancock fans point to a number of sore spots. Many do not like the company's heavy reliance on guaranteed investment contracts, or GICs, a big line of business. Hancock's aggressive bond portfolio has been a serious financial burden.

But the biggest problem for Hancock and for most other US insurance companies has been the American economy. Financial companies all suffer in a bad economy because they can't sell products and the value of their assets invested in stocks, bonds, or loans comes under pressure. Insurers like Hancock continued to earn a profit, but they took their lumps in the past two years.

Declining quality within Hancock's $42 billion corporate bond portfolio, saddled with bonds from Enron, Worldcom, and troubled airlines, hurt corporate earnings. But that was only part of the story.

Executives had worried that agencies such as Standard & Poor's might cut Hancock's rating over the bond problems, which in turn would have threatened the company's ability to sell its guaranteed investment contracts.

Slowly, Hancock's bond portfolio problems have eased this year. "It has gotten better, but it's still been a monkey on their back," said one mutual fund analyst who covers insurance companies.

Now, Manulife has committed itself to the US economy. The Canadian company already counted on American subsidiaries for half its revenue. When the purchase of Hancock is complete, Manulife will look like a US company that happens to be headquartered in Toronto.

Two things will happen at Manulife's new Hancock franchise if the US economy and its securities markets improve. Sales of products and the outlook for the corporate bond portfolio should both improve. The story isn't so pleasant if the economy goes back into a funk.

That's what Manulife has really purchased, a big bet on the US economy. What kind of price it paid depends on the outcome, which will take years to measure fairly.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.

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