An Embarrassment of Riches

John Hancock's CFO explains why he doesn't need the money.
Ed ZwirnMarch 2, 2001

As CFO of John Hancock Financial Services, Thomas E. Maloney is aware of the many means through which to access the capital markets.

He just hasn’t used them much.

But then, with his Boston-based firm’s stock worth about twice the $17 it fetched at its Jan. 27, 2000, initial public offering, why worry?

The bottom line: “We could have raised more capital, but we didn’t see a use for it,” says Maloney.

Indeed, his firm and most others in the insurance sector have so far given the lie to predictions that passage of Gramm-Leach-Bliley Financial Services Modernization Act in late 1999 would set off an M&A explosion.

To be sure, like John Hancock did at the beginning of 2000, several major insurance companies, formerly owned by policyholders, have demutualized, converting themselves into shareholder-owned enterprises, and issued stock.

But analysts say that if anything, the IPOs that resulted in many cases raised little more than the cash necessary to pay off policyholders affected by demutualization.

“Most of the companies that have demutualized could have sold more shares than they did,” said Robert Hartwig, chief economist at the Insurance Information Institute.

Straight debt and/or preferred stock issuance by insurance companies is up over the past couple of years, but not by much. Last year, insurers came to market with $11.3 billion of debt or preferred issues, up from 1999’s $9.2 billion, according to Diane Vazza, managing director and head of global fixed income research for Standard & Poor’s.

Who Needs Money?

So why go public if not to accumulate a war chest for acquisitions?

According to Maloney, of the more than $1.7 billion his firm netted in its January 2000 IPO, it “actually kept very little of this, about $150 million.”

“We could always borrow for acquisitions,” he insists. “But the real purpose [of the IPO] was access to a stock currency.”

Some of this “currency” was needed as a means of incentive compensation, making it possible to offer stock ownership plans or stock options to employees.

But the “real purpose of raising that money was for our policyholders who wanted their proceeds in cash instead of stock.”

He points to his firm’s relatively conservative acquisition strategy over the past few years: In October 1999, the firm acquired Aetna Canada through its Maritime Life Operations division. Other purchases have all kept the firm within the insurance realm, and none have been financed through debt.

“If you look at our balance sheet, you will see that our long-term debt- to capital ratio is just under 10 percent,” he says.

But, while its forays into the corporate bond market have been few and far between, it is apparent from the following example that John Hancock Financial Services could raise large sums at low rates.

A Quick Comparison

On Feb. 22, John Hancock priced a $300 million private offering of Aa2/double-A-plus-rated 6.5 percent 10-year GIC-backed notes at a discount to yield 6.535 percent, or 140 basis points over Treasuries.

According to Robert Riegel, managing director of Moody’s Investors Service’s Life Insurance Group, Guaranteed Investment Contract (GIC)- backed medium term notes, or funding agreements have been an increasing feature of the spread product arsenal deployed by insurance companies such as John Hancock.

Unheard of in the United States only three years ago, these quasi-asset- backed MTNs–the use of which originated in Europe–have expanded to the point of having about $40 billion of outstandings, Riegel says.

These securities are designed to expand the market for GICs, a conservative investment instrument which pays a fixed rate of return for a fixed number of years, beyond pension plans and 401(k)s and help the issuer maintain a conservative balance sheet by going on the books as an “insurance liability, not as a debt obligation,” he adds.

Putting the February John Hancock Financial issue up to comparison against similarly rated corporate bond issues priced during the same month is striking.

A triple-A-rated Georgia Power Co. offering priced Feb. 16 fetched a 6.7 percent yield. General Motors Acceptance Corp. (A2/A0) had to pay 220 basis points over Treasuries for the $2 billion 10-year global offering it brought to market Feb. 23.

While Maloney is quick to point out that GICs and funding agreements are considered a product sale and not a borrowing mechanism to be used for corporate operations and acquisitions, such comparisons must have at least crossed his mind.

But “the only reason,” according to the CFO, for a large-scale plunge into regular corporate debt borrowing, would be “an opportunity [for] an acquisition or a stock buyback increase.”

As to the former, the right company “hasn’t knocked on our door yet,” he says.

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