When Dominic D’Alessandro joined Manulife 15 years ago, the company lost its triple-A rating within a month. It took a decade to get it back, and it was during that time that Mr. D’Alessandro cemented his reputation as a world-class chief executive officer, a run capped off by the acquisition of John Hancock.

Now, in essentially his final month with the insurer, Manulife is poised to lose its gold-plated rating again, and Mr. D’Alessandro’s once-unassailable reputation is tarnished. Manulife has cost investors a lot of money over the past year. In fact, it’s even cost investors money over a five-year period.

It’s possible that the damage inflicted on the company’s balance sheet will be reversed, or some of it. The company may be more conservative than need be. The stock may well be scraping along the bottom now. Or things could deteriorate. But if the worst is done, Mr. D’Alessandro will sadly be long gone before a redeeming final verdict is in. And because of massive writedowns no one cares that the core business is doing pretty well.

Insurers like Manulife are horridly complex beasts, but Mr. D’Alessandro’s troubles have a pretty simple cause: He bet very heavily on positive stock market returns. Manulife sold a lot of products with some type of guaranteed protection, such as segregated funds and variable annuities, on which it would earn a profit if stock markets performed along historical lines.

Unfortunately, the formulas were way too optimistic, in retrospect, and expected profits turned to losses. The charges the company has taken, such as the $3-billion in the latest quarter, mean that Manulife’s past earnings were too high, because they were based on stock return assumptions that subsequently came up way short of estimates – and continue to do so.

The upshot is that it has to set aside money to pay the “insurance” on these products, which are massively under water because stock markets have cratered. How deeply submerged? By about $26-billion. Manulife has taken charges of about $5.8-billion to account for that deficit. (If that seems low it’s because the liability stretches out a long way into the future, so anything you set aside today will grow with interest such that it will cover off future payments – if the assumptions are right.)

And things could get worse. In fact, they have. Yesterday’s results were up to Dec. 31. Since then, the S&P 500 is down about 8 per cent. For every 10-point drop in equity markets, Manulife “loses” $1.6-billion. I put “loses” in quotes because that’s a mark-to-market figure that can be reversed if markets do better than expected.

Why is Manulife so exposed to equity markets compared with other insurers? Partly because it heavily flogged the products mentioned above, partly because it didn’t hedge its positions. A contrite-sounding Mr. D’Alessandro acknowledged this.

Is the worst over for the business? Probably not. Mr. D’Alessandro joked on yesterday’s conference call that incoming CEO Don Guloien would probably want him to handle the next conference call. It was gallows humour.

More serious is a private placement debt portfolio worth more than $26-billion, which has some black-box qualities to it – although the company pledged to shed some light on what’s inside. Manulife says it has better credit quality than other insurers. So far yes, but that could change, although executives are insistent that the big portfolio isn’t in hot water. And then there’s that equity market exposure.

Is the worst over for the shares? Analysts are all over the place, although the stock, by some yardsticks, is looking very cheap historically.

Ultimately the question for investors is whether stocks are at or near their bottom, and to a lesser degree how strongly and quickly will they rebound. If they do so quickly, charges could be reversed and become profits. If not, there’s supposedly not much downside since the company insists it’s being conservative in its reserves. But if stocks fall, as mentioned, the company’s earnings get crushed.

And of course the insurer’s financial models will play a big role in determining the outcome. But as Mr. D’Alessandro said about the assumption inherent in accounting for this stuff, “there’s no lab where you can assay this and tell if it’s 18 carat or 24.”

The same goes for his legacy.

Fabrice Taylor is a chartered financial analyst. ftaylor@globeandmail.com

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