Manulife financial and the John Hancock acquisition.

Lento, Camillo ; Gregoire, Philippe ; Poulin, Bryan 等

CASE DESCRIPTION

This case mainly deals with the opportunity for Manulife Financial to acquire the legendary John Hancock Financial Services, Inc. Students must consider both financial and non-financial aspects of the acquisition decision. Secondary aspects include a host of other financial and strategic issues facing Manulife Financial. The case would be relevant for either a senior undergraduate or graduate course in strategy or financial management as it requires analysis and support drawing from both disciplines. The case is designed to be taught in one to two class hours and is expected to require approximately five hours of outside preparation time. Students need to be familiar with financial management concepts and strategic analysis and formulation.

CASE SYNOPSIS

In 2003 Dominic D'Alessandro is facing his most challenging time since becoming CEO of Manulife almost ten years prior. D'Alessandro must not only decide where to invest Manulife's large cash reserve now that a competitor, Great West Life, became the successful bidder for Canada Life Financial, he must also look at the strategic direction he is to set as consolidation in the financial services industry comes to a close. There are many investment alternatives, including the relatively safe bond market; but, more risky and rewarding options may be required if D'Alessandro wants to continue Manulife's legacy of exceptional financial performance.

Aside from the investment and related strategic decisions, D'Alessandro must contend with an appreciating Canadian dollar, the increased re-insurance risk made evident by the events of September 11th, 2001 and the emergence of the Sudden Acute Respiratory Syndrome (SARS) in the Asian continent. In short, D'Alessandro must pursue an investment course that is strategic, and formulate and implement a plan that will ensure the future profitability and viability of Manulife Financial in the short and long run.

INSTRUCTORS' NOTES

Teaching Focus and Goals

This case is written in a manner such that the students assume the role of a Chief Executive Office of a large, public company. In this particular case, students assume the role of Dominic D'Alessandro, the CEO of Manulife Financial, a large financial institution with global operations. It should be noted at this point that while there is no 'correct' solution to this case, some recommendations are better than others taking into account the information provided in the case. This is an exercise in analysis and judgment that will allow students to develop alternatives and provide support for what they believe is the best strategy, decision and course of action.

Although this case deals with a financial institution it is not a pure finance case. The case deals with strategic issues as much as financial. Detailed financial information is not provided and advanced statistical valuation techniques are not required to develop an adequate solution. As outlined below, the investment decision is more geared towards an analysis of organizational fit, post-acquisition implementation plan and goal congruency rather than detailed financial analysis. Specifically, the teaching goals are for students who take on the top management role to:

1. understand the business model of the industry and the firm;

2. learn how industry and larger social forces, as well as internal strengths and competencies shape top management decision-making;

3. examine feasible options facing the decision-maker in the case, and how the chosen option fits or can be made to fit with both a firm's external (i.e., social and industry) and internal (i.e., functional, cultural and strategic) environments.

Life Insurance and the Manulife Business Model

It is vital to understand the basic business model of Manulife in the context of the insurance business to fully understand this case. Essentially, an insurance company collects a premium from a client in return for providing financial assistance in the case of a catastrophe. For example, a company will collect $100 per year to provide financial assistance of $100,000 in the case of a death. A property and casualty insurance company will collect $1,000 per year to provide payments for third party liability or to repair damage from collision in the case of an accident. If the catastrophe does not incur over the period of coverage (i.e. the term on the insurance) then no payments are made by the insurance company and the proceeds are retained. However, the law of large numbers dictates that a certain proportion of all insurance policies will make a claim.

Determining the price of the premium is a complex process performed by actuaries. Essentially, the price of the premium is set to equal the present value of the probable future cash outflow plus the administration costs including an amount for profit. The mathematical principal of expected value is used to calculate the premium whereby the probability of each future scenario is multiplied by the total cash payout under each scenario. For example, Table 1 shows the pricing calculation for insurance coverage for a one-year term.

The calculation is more complex when the term of the coverage is more than one year. In this case, there will be a timing difference between the premiums collected and the cash settlement. Since there is a timing difference between when the premium is collected (present day) and when the potential cash payment occurs (future date), the time-value of money must be taken into account when calculating the price of a premium. As such, actuaries must make assumptions on the rates of return on the invested premiums.

A simple example will help illustrate the pricing of a premium that is longer than one period. For simplicity, assume that the term of the insurance policy is two years (although this solution will apply to more than two years). The insurance company assumes that it will be able to generate a rate of return on invested premiums of 10 percent per annum. Based on life expectancy rates (mortality tables) the following probabilities of cash payments are calculated as noted in Table 1. Therefore, the probability of a cash payment in year 1 and in year two is $1,115 (assume for simplicity; however, the expected payout normally increases as an individual ages).

Since the company can earn 10 percent per annum on invested premiums, the calculation of the premium price requires the present value of money calculations as follows:

Premium Price = Expected Payoutt + Expected Payoutt+1 / (1+r) = 1,115 + (1,115 / 1.1) = 1,115 + 1,013 = $2,128

Therefore, at the current time, this contract has a present value of expected cash flows of $2,128. Spread out over the two year span, the annual premium price is equal to $1,064. Note that normally the annual premium would be calculated by discounting the payments to the present.

The nature of the insurance industry makes it evident that returns realized on the premiums investment is critical to the financial success of company. If the expected return used to calculate the price of the premium is greater than the return actually realized, the insurance company will likely not be profitable. However, the company should experience high levels of profitability if the return realized is greater than that expected return.

To illustrate this point, assume that the company prices the premium as described above. However, the company only realizes a return of 5 percent per annum. Therefore, the future value of the premiums would be calculated as follows:

= 1,064 (1.05) + 1,064 = 1,117 + 1,064 = 2,181

Therefore, the company would have assets of $2,181 at the end of the second year. Based on the assumptions provided in pricing the contract, the expected payout of the contract would be calculated as follows:

= 1,064 (1.1) + 1,064 = 1,170 + 1,064 = 2,234

Therefore, on average, the company would lose $53 per contract calculated as the expected payout of $2,234 minus the cash on hand of $2,181.

The opposite is true if the actual realized returns on the investments are higher than what was expected and used to calculate the contract price. In this case, the company would realize an excess profit on each contract. For this reason, investment returns are vital to the profitability of an insurance company. The higher the investment return earned, the greater the profitability that accrue to the shareholders after each contract is settled.

Insurance companies tend to invest their premiums in a balanced portfolio of stocks, bonds, and long-term investments in subsidiaries. Risk management is essential during the investment process because large losses resulting from excess risk would eventually lead to insolvency as future liabilities will exceed assets.

External and Internal Analysis

The students should approach the solutions by taking into consideration the information provided regarding the history, vision and strategies of Manulife Financial. Furthermore, when assuming the role of Dominic D'Alessandro, students should make decisions that are consistent with the biography presented in the case. The recommendations and implementation plan should be congruent with the company's vision and renewed strategy. The vision presented in the case.

The existing vision seems appropriate and consistent with the 'PRIDE" values, expressed as goals that resonate with major stakeholders of Manulife (explicitly customer and employees and implicitly shareholders). The PRIDE values are stated in terms these four attributes (refer to Manulife Case, pp.3, for a description of the PRIDE values).

The main SWOT (strengths, weaknesses, opportunities, threats) may be derived from the analysis of the internal functions and structure of Manulife, beginning with financial position and also including analysis of the marketing, operations and human resources functions, and analysis of the industry in the context of the more macro or social environment.

The industry may be characterized as a favorable four out of five stars, using Porter's (1980) '5 forces' model of industry analysis (forces that have little power over strong incumbents such as Manulife are suppliers, individual buyers, substitutes and competitors, the latter becoming fewer as the industry consolidates). The only unfavorable force is new entrants, namely banks which are increasingly packaging insurance offerings with their other services, especially loans. Looking to social factors, all seem favorable. The political landscape appears to keep insurance separate from banking, both in terms of services and ownership; however, this is changing, evidenced in the near mergers in the recent past.

The strengths of Manulife include financial acumen, efficient systems, investment savvy and, although only implied in the case, a productive and employee workforce, all of which contribute to superior performance. Further to these valuable and difficult to imitate resources (Barney 1991), Manulife also seems to have deep rooted competencies (Prahalad and Hamel, 1990) that allow for integrating with merger partners. This is possible with the coherent vision and PRIDE values. Such an approach to strategic analysis as outlined here can be found in any good strategic management text, e.g., Hill and Jones (2004, p. C2).

One challenge is to craft a renewed strategy that is consistent with the vision as "the most professional life insurance company in the world: providing the very best financial protection and investment management services." In Porter's (1980) terms this must mean an increasingly differentiated provider. Since there are undoubtedly learning and scale effects that favor large players, Manulife's determination to become one of the larger players seems entirely appropriate.

All that remains is to know when to acquire suitable partners that already share or have the potential to adopt Manulife's values, vision and strategy. After the scale and scope of service is secured, then it will be a matter of continually renewing the strategy to keep Manulife moving in the direction to becoming the preferred financial institution, worldwide. This takes us to the specifics of the decision of where next to invest.

Feasible Investment Options

At this point in time, feasible options revolve around where to place the resources of Manulife and some basic questions need answering, starting with:

1. Where should the large cash reserves be invested? What is the feasibility of Manulife acquiring John Hancock Financial, or merging with the Canadian Imperial Bank of Commerce? Would the safer bond market be the best place to invest the money?

This is main issues of the case. Manulife Financial has a large cash reserve left over from an unsuccessful bid for Canada Life Financial. A large cash balance is not effective investment management as cash tends to have very low returns. The cash must be invested to earn larger returns. The following is a discussion of the potential pros and cons that students should identify and analyze while reaching a conclusion on where to invest the large cash reserves.

John Hancock Financial Acquisition

Advantages

The acquisition of John Hancock will give Manulife increased presence in the United States and will complement its service offerings. Manulife has experience in the U.S., with their U.S. Division, and is familiar with the market, regulations and customs.

* The fact that the Canadian dollar has been steadily appreciating recently has made a potential acquisition of a U.S. company less expensive. Manulife Financial will need less Canadian dollars to purchase the firm in U.S. dollars as the currency appreciates.

* John Hancock management fully expects cross-border purchases and is open to the idea of Manulife Financial acquiring John Hancock financial. The case also mentions that the CEO John Hancock indirectly confirmed that Manulife would be a suitable merger. This is in stark contrast to the Canada Life Financial attempted take-over, whereby management did not want Manulife to become their parent company. This is a crucial point that should be identified.

* Manulife Financial has a long history of acquiring other companies as an engine of growth. Shareholders and management are familiar and accustomed to acquisitions. It is safe to assume that the current management has the experience with acquisitions.

Disadvantages

* This may seem to be a relatively risky option when compared to the more stable and secure bond market, though the risk of the John Handcock acquisition is mitigated by its consistency with the direction the industry is heading (consolidation for reasons of scope and scale) and the apparent fit between the two companies.

Canadian Imperial Bank of Commerce Merger

Advantages

* A merger with CIBC would allow Manulife to increase the breadth and reach of their products and service by cross-selling products through the CIBC bank branches. Insurance can be combined with other banking services and sold in bundles.

* There are a host of potential cost savings and synergies that could arise from the merger. Branches or service outlets of CIBC and Manulife can be merged, thus reducing the total number of branches and employees required.

* A merger of this caliber will also create the largest financial institution in Canada, thus allowing for certain economies of scale and for increased competition against some of the larger, global institutions.

* CIBC's business should also benefit from the merger for the same reason that sales of the Manulife products would increase. CIBC would be able to promote and sell their banking services to the large number of client dealing with Manulife.

* The share price of CIBC is currently below what would be its fair market value because of some losses (Amicus bank and Enron) that are not expected to recur. The currently suppressed share price makes it an attractive target to attempt a merger/acquisitions.

Disadvantages

* This option is currently not feasible. A cross-pillar merger is not allowed by the Canadian Government at this time for fear of a monopoly and decreased competition, which is against the public's general interest. Therefore, taking the role of Dominic D'Alessandro, the student should identify a lobbying strategy as part of their recommendation.

* This is a very risky, and time consuming proposition.

* A merger with another institution of this caliber may be difficult if the organization's cultures are very different: i.e. between banks and insurance companies.

* It is not currently possible to identify who would have control of the corporations after the merger. CIBC and Manulife are both larger Canadian financial institutions and their maybe a risk that Manulife may lose control of the corporation after a merger.

Bond Market

Advantages

* The primary advantage of the bond market is that there is very little risk involved in this option.

Disadvantages

* The primary disadvantage of the bond market is that there is no potential for large excess returns that will help Manulife achieve its financial goals.

* The current yields on bond markets are low compared to the historical averages.

Students can make a case for all three possible investments. There is no correct investment choice, although the case does give some hints to the students that should lead them to conclude that purchasing John Hancock Financial is the most appealing strategic option. However, the fact that Manulife subsequently did purchase John Hancock does not necessarily corroborate the notion that this purchase was the best course of action. Some of the hints in the case are as follows:

* Manulife has a history of using acquisitions as a vehicle of growth.

* The case hints that D'Alessandro may have to take on a risky strategy, compared to the bond market, to ensure that the financial targets are met.

* The CEO of John Hancock is open to Manulife purchasing the firm. This is in stark contrast to the past acquisition attempt.

* The case outlines that business researchers have identified the fact that acquisition in the same line of business are most successful than when a company purchase a company in another line of business (i.e. a bank--CIBC vs. an insurance company--John Hancock).

The advantages and disadvantages outlined above is by no means an exhaustive list. Students may identify other advantages and disadvantages that were not discussed thus far. The purpose of this case is to help students walk through the more qualitative aspects of a large scale investment decision.

2. Furthermore, if an acquisition was the best investment option, how would Manulife Financial handle the post-acquisition strategy to ensure that Manulife adds value in its offerings in different markets over the long term?

If students recommend an acquisition or merger, an analysis of the post acquisition strategy should be included as part of the implementation plan. The case provides hints at what would be required as part of the strategy.

The case has a specific paragraph that should prompt students to consider the post purchase plan. Business literature presents some conclusions regarding mergers and acquisitions. There are many difficulties of implementing a successful value added acquisition strategy, as post-acquisition difficulties arise because managers of the acquiring company did not deeply understand the target company at the time of acquisition, or that the acquirer imposed an inappropriate organizational design on the target as part of the post-acquisition process. Also, inappropriate management incentives that exist at both the top management and divisional level led to unsuccessful mergers. Acquiring returns are greater in acquisitions in which the acquirer and the target are in the same line of business. The acquirer should have a deep understanding of the targets business and industry before negotiations.

There is a wide variety of studies conducted on post merger acquisition strategies. The research provides some insight into the activities that create a successful strategy. There is a host of research conducted on the factors that help in achieving success in an acquisition/merger. Pautler (2003) prepared a summary and analysis (quasi meta-analysis) of the research. The resulting factors of success vary depending upon the type of transaction, but there are some commonalities amongst the findings that apply to a wide range of circumstances:

* Acquisitions that preserve the original focus of the firm tend to result in superior outcomes.

* Equal-sized firms that merge work less often than others. This is a caveat against the merger with CIBC, although students are not expected to be aware of this fact.

* The chances of success are greatly improved if planning for the integration of the new physical and human assets begins at an early stage.

* Quick integrations and early pursuit of available cost savings improves outcomes.

* Managers must be aware of cultural differences between the two organizations. Management must create tailored communication with employees, customers, and stakeholders to avoid conflicts.

* Successful integration requires managers to retain the talent that resides in the acquired firm, particularly in mergers involving technology and human capital.

* Minimizing the attrition of both customers and sales force.

While the overall financial outcome of mergers is clearly of interest in many of the consulting firm studies, the studies also focus on why mergers might have performed as they did, and whether performance could be improved by better implementation of merger-related changes. These factors are discussed below as identified by Pautler 2003.

Sometimes problems with the integration occur because the acquired assets did not fit into a broad strategy of the acquiring firm. Other times the broad strategy includes the intention to move the firm beyond its traditional area of competence and the firm is simply unable to effectively integrate the assets in this new area. The first case is a mistake in matching; the second case is a mistake in over-reaching.

Both bad ideas and implementation are less likely to occur if the acquiring firm has experience with the type of assets it is acquiring. A factor that has been found to make deals work more frequently is a close relationship between the acquired assets and the core expertise of the acquiring firm. Geographic market extension and capacity expansion deals are thus more likely to be successful than are cross-border transactions aimed at corporate diversification.

Other factors that are revealed include the importance of maintaining pre-merger revenue growth rates, the importance of clearly delimiting responsibility for merger implementation, and the need to communicate to all the parties involved in the transition.

A number of other financial and organizational aspects of post-merger integration are found to be important. Early integration planning is almost universally recognized as a way to increase the probability of success in a merger. Similarly, many studies emphasize the need to define corporate goals and clearly transmit these goals from the management team to the new merged entity, while simultaneously addressing differences in the corporate cultures of merging businesses. The importance of retaining customers and key staff during the initial transition period is another highlighted factor, as is timely handling of regulatory issues. In terms of enhancing shareholder value, authors lay varying amounts of stress on maintaining or expanding revenue growth after the merger, and identifying and achieving cost synergies.

The speed of a post-merger transition is frequently said to be a key factor in improving merger performance, but in mergers such as those done to acquire new skills or technology, this factor may not be of primary importance. Several consulting firms focus on gains from traditional synergy sources such as scale and scope economies, while others focus more on cross-selling, bundling, and various revenue-side effects of mergers. In addition, some disagreement exists regarding whether experience in merger activity is an important determinant of success.

An article written by Chanmugam, Anslinger and Park (2004) outlines the most common myths and realities regarding post acquisition implementation strategies. Students may fall into the belief of these myths. A brief summary of the most common myths and realities is as follows:

Myth: The post-merger integration process begins when the deal is closed.

Reality: The probability of deal success increases when the key elements of post-merger integration are not only started before closing, but when the likely risks and challenges of the integration are considered at the very beginning of the acquisition process. All of the elements that affect post-merger integration success, especially the culture of the companies, must be assessed and rolled into the synergy value (and price to pay) calculation.

Myth: There is one best way to conduct post-merger integration.

Reality: Using the logic that any deal can be made to work if an exact approach is used, some companies follow by-the-book approaches to integration. Instead of using a one size fits all approach; the integration process must instead be customized to the specific transaction's particular complexities and idiosyncrasies.

Myth: During the integration, make as few changes as possible to cultures.

Reality: Not making changes during the integration phase misses a tremendous opportunity to take advantage of a ripe environment for change. Change is always disruptive--but during integration, change is not only necessary, but expected. The integration period is an excellent time to rethink old ways of doing business and to create a clean sheet of cost structures, cultures, operational processes, and resource and technology requirements.

Booz-Allen and Hamilton (2001) developed a set of principals that the student, taking the role of Dominic D'Alessandro, can use to create a successful integration process. The principals:

1. Communicate the shared vision for value creation. The shared vision should include fundamental questions that drive the integration process: how will we create value, how will we approach this merger, how will this merger be led, and what people strategy is required?

2. Seize defining moments to make explicit choices and trade-offs. There are a host of trade-offs that arise. There are four key areas that require explicit trade-offs:

a. How will we create value (sources of synergy)?

b. How will we approach the merger (integration vs. new entity)?

c. How will this merger be led (CEO role, decision-making involvement)?

d. What people strategy is required (desired culture, retention, leadership)?

3. Simultaneously execute against competing critical imperatives. The imperatives for successful integration include translating the shared vision, building stakeholder enthusiasm, creating one unified company, capture value through synergies, maintaining stable operations, and closing the deal in an appropriate manner.

4. Employ a rigorous integration planning process.

There is no 'one size fits all' formula for different situations. However, there are specific issues that must be addressed by the students as part of their implementation.

* Define and make the John Hancock Financial employees aware of Manulife's corporate goals and the PRIDE values to ensure future actions are congruent with Manulife's corporate identity.

* Make organizational cultures compatible.

* Cross-selling through John Hancock Financial distribution channel.

* Identify the need to keep key employees and talent currently at John Hancock Financial within the combined entity.

* Identify potential synergies, cost savings, and economies of scale.

3. What, if anything, should be done with respect to the appreciation Canadian dollar?

Students may be inclined to assess the movements of the Canadian dollar subsequent to June 2003. The Canadian dollar subsequently rose much higher that the 74 cents identified in the case. As of early 2006, the CAD/US dollar exchange rate was approximately 85 cents.

Manulife discloses its foreign currency risk strategies. The Manulife Financial 2003 Annual Report states that "the Company's foreign currency risk management program incorporates a policy of matching the currency of its assets with the currency of the liabilities these assets support. The program also incorporates a policy of generally matching the currency of its equity, up to its target MCCSR ratio, with the currency of its liabilities, to limit the impact of changes in foreign exchange rates on the Company's MCCSR ratio. The Company holds equity in excess of its target MCCSR ratio predominantly in Canadian dollars to mitigate the impact of changes in foreign exchange rates on shareholders' equity. The program also delineates the currencies in which the Company is authorized to transact."

The MCCSR ratio measures the Minimum Continuing Capital and Surplus Requirements of a financial institution. In Canada, risk-based capital requirements that federally licensed insurers must meet in order to be considered solvent. The MCCSR are similar to the National Association of Insurance Commissioners (NAIC) risk-based capital (RBC) ratio requirements in the United States. The ratio is defined by the Office of Superintendent of Financial Institutions in Canada and is to complex to be considered by students.

The Canadian dollar's appreciation is a problem outlined in the case; although it may also be an opportunity. As the Canadian dollar appreciates, the potential acquisition of John Hancock Financial will be less expensive. Furthermore, since Manulife re-invests all of their earnings from the U.S. Division back into the United States, there is no real loss of purchasing power. The translation losses are therefore mostly a paper/accounting loss and may be offset the decreased purchase price of John Hancock Financial. Therefore, regardless of the case information, student may suggest that the appreciating Canadian dollar is not a real economic threat.

Students may also suggest the use of financial derivatives/instruments to hedge the effects of the Canadian Dollar. The futures or forward market, or options can be suggested to reduce the effects a rising Canadian Dollar into the future. All of these potential hedging instruments are viable options; however, students should be caution that U.S. Dollars are only converted into Canadian Dollars for accounting translation purposes. Since returns are re-invested in the U.S., there is no actual foreign currency translation that takes place. If a hedge is suggested, student should be aware of the fact that the Manulife must actually take delivery of the foreign currency regardless of the flow of cash from their operations.

4. As the profits from the reinsurance divisions decreased to abnormally low levels, what can be done to manage or mitigate the increased risk of man-made catastrophes?

Before presenting some of the possible solutions of the risk of terrorism, it is vital to understand the effects that the acts of September 11, 2001 had on the reinsurance operations of insurance companies. Tight market conditions were already in place before the September 11th terrorist attacks. Climbing combined ratios, after several years in a soft market, had led to double-digit price increases in policies. The North American economy was spiraling downward; low interest rates prevailed. There was the rout of technology stocks, weak stock markets, low investment returns. Furthermore, the insurance industry was being faced with the potential losses from asbestos and mold claims.

The terrorist attacks forced reinsurers to rethink their approach to business, to develop new rating models, and to revise underwriting philosophy. The affordability of reinsurance was severely impaired and most reinsurers no longer covered terrorism risks. Some reinsurers ceased operations (i.e. Scandinavian Re, Fortress Re, & Copenhagen Re), while the ratings of other reinsurers have suffered severely. The four major effects of September 11th include:

* Contraction in global reinsurance capacity: Insurers have become more cautious in their underwriting of risks. Reinsurers may find their arrangements inadequate to cope with the future size of claims. Primary insurers may wish to seek greater reinsurance protection but reinsurers may instead wish to reduce their capacity on offer.

* Hardening of Premium Rates: Price for reinsurance protection has risen dramatically, leading to a rise in price for direct insurance. This is a function of many factors other than contraction in capacity and the need for reinsurance companies to rebuild their reserves. The tragic events have introduced new types of risks and larger potential losses. The amount of capital required for insurance risks is greater than formerly understood.

* More Coverage Restriction: Some reinsurers may find specific sectors to be of such high risk that they are not prepared to provide cover. Underwriting standards will tighten and catastrophe reinsurance can become too expensive to acquire.

* Financial Strain on Certain Insurers: Given the uncertainties surrounding the cost of the terrorist attacks, some less capitalized insurers may not be able to weather the storm.

Reinsurers now analyze risk differently, by placing greater focus on the bottom line. Historical business relationships have a lower priority, as reinsurers are taking a more hard-nosed approach. They ask: Will this business generate the type of return needed on my capital to justify writing it?

Pricing methodologies are also being revisited because reinsurers are aware of the fact that there can be a correlation between losses of different lines of business. Most reinsurers believe Terrorism is a non-insurable peril (without a Government backstop). Terrorism is a man-made event, unpredictable, and impossible to price and assets of reinsurers are finite. Reinsurers can supply a limited amount of capacity, as overall exposure is too large for the industry to assume.

Insurers have typically hedged the risk they assume to insure property, reducing their exposure to acceptable levels by purchasing coverage from reinsurers. The perception was that the U.S. was effectively immune to terrorist attack, so that insurance companies did not need to demand additional premiums for such coverage. This changed on September 11. Immediately following the September attacks, the reinsurance industry informed insurance companies that they would no longer include coverage for terrorism in their policies without an extra cost.

The impact of the terrorist attacks has been immense on Manulife. "As a result of the terrorist events of September 11, 2001, exposure to loss is estimated at $360 million before catastrophe coverage, reserves and taxes. Accident reinsurance exposures accounted for 80 per cent of this amount with Property & Casualty and Life risks accounting for the balance. These exposures were reduced by $120 million of catastrophe coverage, $60 million of expected tax deductions and $80 million of existing net reserves. Actual Reinsurance Division claims will not be known for several years; therefore, the Company established additional net reserves of $50 million during the third quarter of 2001" (Manulife 2001).

The profits from the reinsurance division have decreased to an abnormally low level because of these acts of terror. However, the financial losses resulting from the events of September 11th, 2001 are not controllable any-longer. They are historic costs that have already been incurred. Students should identify that these events have made evident the real risk in the insurance market and offer possible actions plans to deal with these risks into the future. Some of the possible recommendations regarding the increased risk of terror include, but are not limited to:

* Increase Premiums: The most obvious solution to the terrorism risk is to redevelopthe pricing formula used to calculate the premium prices. The price has already increased since 2001 as a result of the increased risk of future payouts. By including the probability of large scale man-made catastrophes in the pricing formula, the risk of these actions will essentially become a mute point similar to any other risk.

* Avoid Insuring These Acts: Students may also suggest that Manulife should stipulate that property and casualty insurance contracts do not cover these actions. Therefore, the risk of these actions will be essentially eliminated.

* Separate Insurance Contract: Furthermore, it may be possible for Manulife to offer a separate insurance contract for these specific acts. The contracts will be priced separately from other types of catastrophes and will offer coverage for these specific acts.

5. Although contingency planning has commenced for the Canadian divisions and changes have been made to financial operations of Taiwan, was this enough to handle the SARS risk?

Life insurance companies have a variety of ways to avoid or mitigate the risk of catastrophes, the most common of which is transferring the risk of multiple deaths to reinsurers (although the cost has increased dramatically since the recent terrorists attacks).

However, Manulife has been much more proactive in dealing with the SARS situation and has already implemented many procedures to deal with the SARS situation and maintain goodwill (as opposed to dodging the risks). These actions are consistent with the PRIDE values. Manulife has already undertaken the following actions, as outlined in the case:

1. The daily hospital income benefit from Manulife medical riders will be doubled for hospital confinement as a result of SARS related case.

2. When a policyholder recovers from SARS and quarantined at home, 50 per cent of the daily hospital income will continue to be payable during the 10 day quarantine period.

3. For death within 30 days after the confirmation of SARS, an extra death benefit of 100 per cent of the sum assured under the life policies, subject to a maximum additional benefit of $100,000, will become payable.

4. Manulife Taiwan confirmed that all health insurance policies include statutory infectious diseases. If a policyholder has the misfortune of contracting SARS, they will be eligible to claim for medical expenses as per the standard provisions.

SUMMARY, POST-CASE EVENTS AND OTHER CONSIDERATIONS

This is an exciting time. It is clear that Manulife is a superior performer in the financial services industry and in the insurance industry in particular and the Manulife CEO has the vision and the strategy to make this possible by taking advantage of opportunities such as the John Hancock acquisition. The question then becomes how Manulife will fare once the consolidation in the industry is complete. The CEO will certainly have to guard against complacency and keep Manulife abreast of the risks and rewards of a world that is growing increasingly global and interdependent, as the recent scares with September 11, 2001 and more recently over SARS and other potential pandemics and disasters have amply shown. This is what happened.

On April 28th, 2004 Manulife acquired John Handcock and became North America's second-largest life insurance company and the fifth largest worldwide. Manulife's 2004 Annual Report provides insight on how the acquisition of John Hancock was handled:

"Throughout 2004, the integration of the John Hancock businesses was a primary focus of the Company's management and employees. We made good progress on integrating our operations and expect that we will be substantially finished with this endeavor by the end of 2005. It is an enormous task that has significantly effected each of our divisions....

The John Hancock merger, as would be expected, had its most dramatic effect on our U.S. Operations where the transaction added tremendous diversity and scale. Within both our U.S. Protection and Wealth Management Divisions, we broadened product lines, expanded the breadth and reach of our distribution channels, added to the depth and expertise of our management team and finally, added the well recognized John Hancock brand. In 2005, across all our U.S. businesses, our products will be marketed using the well established John Hancock brand ...

Successfully integrating two large and prestigious organizations such as Manulife and John Hancock is a difficult task that would be impossible without a constant focus on providing real value to customers and attracting and retaining the best and most talented teams in the industry" (p. 6).

REFERENCES

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Barney, J. (1991). Firm Resources and Sustained Competitive Advantage, Journal of Management, 17, 99-120.

Chanmugam, R., Anslinger, P. & Park, M. (2004). Post Merger Integration myths versus high-performance realities. Outlook Point of View, July. Retrieved at: http://www.accenture.com/NR/rdonlyres/0BB9A876-CE12-4E91-872F-FFD72F6E27E/ 0/postmerger_a4.pdf

Hamel, G. & Prahalad, C.K. (1990). Competing for the Future, Boston: Harvard Business School.

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Manulife Financial. 2001. Manulife Financial Annual Report.

Manulife Financial. 2004. Manulife Financial Annual Report.

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Pautler, P.A. (2003). The Effects of Mergers and Post-Merger Intergration: A Review of Business Consulting Literature. Bureau of Economics, Federal Trade Commission.

Camillo Lento, Lakehead University

Philippe Gregoire, Lakehead University

Bryan Poulin, Lakehead University

Table 1--Calculation of Premium Price (one year term)

Scenario Probability of Cash A X B
 Occurrence Settlement B
 A
Major Catastrophe 0.0001 100,000 $10
Minor Catastrophe 0.1 10,000 $1,000.00
No Catastrophe 0.8999 0 0
Expected Payout $1,010
Administration $105
Premium Price $1,115