John Hancock Again Under David Schiff’s Microscope

Last July, David Schiff, editor and writer of Schiff’s Insurance Observer, wrote that John Hancock Financial Services’ CEO David D’Alessandro “should be fired” for taking approximately $21.7 million in compensation for 2002. He was one of the highest paid executives in the industry, at a time when his company, demutualized in 2000, wasn’t doing that well.

Schiff also charged that neither D’Alessandro nor former Hancock CEO Stephen Brown had drawn policyholders’ attention to a memo from Morgan Stanley, Hancock’s financial advisor, written in Nov. 1999. That document estimated the company’s value was between $8 billion to $10 billion, making a share worth between $26.66 and $33.33—far higher than the $17 IPO price at which 75 percent of Hancock’s policyholders were cashed out. If the figures are correct, and so far no one has challenged them, policyholders lost around $1.8 billion in diminished value.

That was the headline in a three-part issue of the Observer that began Oct. 23. The issue repeats the earlier charges and adds some new fuel to the fire that the industry’s leading gadfly is building under D’Alessandro.

The Hancock article is impeccably timed, coming shortly after the announcement in September that Canada’s Manulife Financial Corp. would acquire the company for $11 billion in stock. Each Hancock shareholder is to receive 1.853 Manulife common shares, which values them at $37.60, an 18.5 percent premium over current value, and more than double what the policyholders got in 2000. No wonder Schiff is revisiting the matter.

He has often voiced his objection to demutualization plans in general and a number of them in particular, as he feels they systematically shortchange the policyholders, who are in fact the owners of mutual insurers, by routinely underestimating what the company is really worth. At the time of Hancock’s demutualization he pointed out at a public hearing in 1999 that the $17 figure greatly undervalued the company. But he’s not against demutualizations in general.

“At one point during the hearing, Hancock’s lawyers asked me if it wasn’t true that I was just opposed to all of them [demutualizations],” Schiff said via telephone. “I’m not against them, if they’re done fairly, but Hancock went out of the way to be unfair.” When he testified, Schiff had not seen the Morgan Stanley memo, which surfaced later. “Basically they buried it among thousands of pages of documents they submitted.”

The Observer articles set forth in the meticulous detail that is his hallmark, exactly what happened. They also ask the bigger questions of how and why. It is not by accident that the newsletter’s logo is a determined bulldog typing away. Whether one sees Schiff as the Woodward and Bernstein of insurance reporting, one thing is certain, his research is exhaustive and his logic is implacable. In 14 years, “I’ve been sued twice, and both suits were crazy, and were thrown out of court,” Schiff said. “I have never been asked to publish a correction or retraction,” he added.

To get the full story, one should read the Observer, but Schiff’s concerns are clear. “An honest company should put important things in plain sight,” he said. “Material things should be disclosed, not hidden under tons of stuff.” As the Morgan memo and Manulife’s bid have now proven, Schiff’s valuation, given in 1999 was the correct one. There is strong evidence that the share price when Hancock demutualized was set lower than its actual value.

Schiff points out several consequences. Firstly, in contrast to most demutualization plans, the company paid cash to 75 percent of its shareholders rather than giving them shares in the new company. Secondly, the IPO went off at a depressed price, $17 a share, which certainly helped D’Alessandro and other insiders to acquire a total of 126,950 shares shortly afterwards (with money they borrowed from the company).

Thirdly, it established an artificially low price for the company and its shares. As proof of this Schiff pointed out that management demanded, and got, a three-year anti-takeover provision written into the demutualization regulations. “Why would they need that?” said Schiff, “if they didn’t know the price was too low?” The rise in value after the IPO has also served to justify D’Alessandro’s high salary and bonuses—around $100 million between 2000 and the end of this year—according to Schiff.

“What value has D’Alessandro created,” he asked. “What was it equal to? If it was worth that much to begin with, then the value was always there.” Until this year those have been rhetorical questions—not any more.

In May attorney Jason Adkins filed a lawsuit in Boston on behalf of Aaron Landy, a Hancock shareholder in Texas, seeking repayment from D’Alessandro and other top executives of some $42.3 million in what the suit claims was excessive compensation.

Another aspect, first raised by Schiff, is the possible violation of Massachusetts’ laws. Chapter §175 19E9, according to the Observer, prohibits directors and officers of a mutual company from receiving any “fee, commission, or other valuable consideration whatsoever, other than their usual regular salaries and compensation, for in any manner aiding, promoting, or assisting in such [demutualization] conversion.”

The statute usually applies only for the first year after a conversion—which explains why D’Alessandro et.al. borrowed money to buy the bargain priced shares. But D’Alessandro also received a $1.96 million “incentive award” in 2001, the year after the merger, which specifically recognized his efforts in transforming the company from a mutual to a publicly traded stock company. The defendants’ lawyers have argued that the bonus, paid more than a year after the IPO, was legal, but such fine distinctions in effect circumvent the law.

Speculation now centers on what will happen next. Schiff is pessimistic that the merger with Manulife will result in any new interest in pursuing D’Alessandro. Moreover he’s worried about a possible “take the money and run” syndrome. He estimates that Hancock’s management will realize around $60 million when the deal closes. Under the terms of their contracts most of them, including D’Alessandro, can leave with all their stock options and bonus arrangements immediately due to the company’s ownership change—enough “golden parachutes” to supply the 82nd Airborne.

Canadian commentators on the other hand are worried he might stay—albeit in Boston, not Toronto. Manulife’s CEO Dominic D’Alessandro (no relation to David), who will head the combined company, has agreed to name David as COO and “future president” of Manulife, to take effect 12 months after the transaction closes. He’s therefore first in line to take over the entire operation when Dominic, 58, decides to retire, and he could move Manulife’s headquarters to Beantown. If he does, however, he might take a large salary cut. Dominic earned C$ 3.6 million (U.S. $2.77 million) last year, around 13 percent of what David earned.