Manulife takes hit over failure to disclose court case
TORONTO Canada’s biggest life insurer is under pressure from shareholders to explain why it failed to disclose details of an ongoing court case that came to light after a short-seller released a report detailing the litigation.
The stock has dropped 11.5 per cent since Muddy Waters Capital LLC said last week that it had taken a short position, compared with a 4.7-percent decline in the stocks in Canada’s financial sector.
Muddy Waters cited a court case pending in Saskatchewan it believes could damage Manulife’s financials. The case was filed on Nov. 23, 2016 by Mosten Investment LP, managed by Ontario businessman Michael Hawkins, documents show.
The case relates to life insurance policies sold more than two decades ago, when interest rates were much higher, that allowed holders to invest their surplus funds in side accounts with guaranteed interest rates of up to 4.0 per cent.
The gravity of the case is underscored by an affidavit filed by a partner with management consultants Oliver Wyman, which states that if the side accounts can be used as investment vehicles it would potentially expose insurers to unlimited liability and ultimately cause them to become insolvent. The consultancywashiredbyManulife’s lawyers.
Insurance experts say the side accounts were meant to be used to ensure policy holders receiving income on their investments stayed within the limits required to avoid tax. If they were holding excess funds, they were deposited in the side accounts until they could be reinvested in the main policies.
Court documents show Mosten, which had a balance of just under $17,000 in the side account in December 2012, tried to deposit further funds in the spring of 2016 but Manulife refused to accept further deposits.
Publicly traded companies routinely alert shareholders to material risks through regulatory announcements but Manulife’s decision to withhold the case has angered some shareholders.
“I think they should have disclosed it as soon as the legal action was filed,” said Lorne Steinberg, president of Lorne Steinberg Wealth Management Inc, a Manulife shareholder.
Manulife declined to comment on Friday about whether it should have informed investors earlier about the case, which it said last Thursday was “legally unfounded.”
The Ontario Securities Commission declined to comment on the Manulife case.
Two other Manulife shareholders, who asked not to be named, said they had questioned Manulife’s investor relations team since last Thursday over why the case was not disclosed earlier but were told the insurer believed it may not have a material impact.
David Anderson, chief executive of advisory firm Anderson Governance Group, said the case typified a lack of effective communication between Canadian firms and their investors. “This general reluctance of boards to show a meaningful level of transparency expected by their shareholders continues to get companies into trouble,” he said.