Oct. 1 (Bloomberg) -- Donald Guloien said he had “maybe a week” to enjoy his promotion to chief executive officer at Manulife Financial Corp on Sept. 8 last year. Then the financial world collapsed with the bankruptcy of Lehman Brothers Holdings Inc.

“I got all these congratulatory notes; things were looking pretty good,” Guloien said in an interview yesterday. “Then Sept. 15th, life changed for everybody.”

The biggest financial crisis since the Great Depression has already shaped Guloien’s tenure as head of North America’s biggest insurance company. He cut the dividend in half, scaled back on equity-linked insurance products and vows to build up “fortress level” capital to withstand any additional stock declines.

“We’re trying to dial back the risk,” said Guloien, a 28- year veteran of the Toronto-based company who formally took over as CEO in May when Dominic D’Alessandro retired.

Guloien’s measures are in contrast to D’Alessandro’s, who expanded sales of so-called variable annuity products, and said he would only cut the dividend in a “cataclysmic” market decline. D’Alessandro, who engineered the $13.9 billion John Hancock acquisition in 2004, ran Manulife for 15 years.

“Variable annuities became too big a part of Manulife’s portfolio, from both a marketing perspective and a risk perspective,” Guloien said.

Quarterly Losses

The costs to guarantee annuity client returns as stock prices plunged led Manulife to report two straight quarterly losses this year, the first since going public in 1999.

Guloien’s caution isn’t sitting well with all investors. The stock plunged 15 percent on Aug. 6 when he announced the dividend cut, the first reduction by a major Canadian financial services firm since 1992. Manulife is the fourth-worst performing stock this year of the 37 in the Standard & Poor’s/TSX Financials Index.

“It was a shock to the investment community,” said David Baskin, president of Baskin Financial Services in Toronto, which manages about C$300 million ($280 million), including Manulife shares. “Nobody expected that to happen, and it knocked the crap out of the stock.”

Manulife fell 60 cents, or 2.7 percent, to C$21.90 at 4:10 p.m. in trading on the Toronto Stock Exchange. The shares have risen 5.3 percent this year.

No Gambling

Stephen Jarislowsky of Jarislowsky Fraser Ltd., Manulife’s fourth-largest investor, called Guloien in August to complain about the company’s failure to hedge the annuities.

“What I really objected to was that I was told before that there was no problem,” Jarislowsky said in an interview. “My indication to them was that I am not buying Manulife stock to do that kind of gambling.”

Guloien, 52, says he’s scaling back annuity sales and adding more hedges on them to protect against market declines. Variable annuity sales at John Hancock fell 26 percent to $3.79 billion for the first half of the year, according to consulting firm LIMRA International Inc. Guloien says the reduction of risk will pay off over time.

“There is too much focus on short term” stock prices and quarterly earnings, he said. “You worry about the long run.”

Guloien vows to build “fortress” levels of capital that can be used for potential takeovers and to buffer potential credit losses.

Draconian Scenarios

“We have to consider capital scenarios that are far more draconian than what I think is likely to happen,” Guloien said.

Guloien said the capital cushion will allow Manulife to take advantage of a “host” of takeover options in Asia, North America and Europe.

“Opportunities that we see today are as attractive as we’ve ever seen in our history,” Guloien said. They all “can be traced back to the financial crisis.”

Guloien will “never say never” to a combination with a Canadian bank, although such transactions are barred by the federal government.

“The synergies between a Canadian bank and a Canadian insurance company could be significant, but not life- altering,” Guloien said. “It’s not a game-changer for us.”

Guloien, in New York yesterday to celebrate 10 years of trading on the New York Stock Exchange, said better diversification and risk management are vital for financial- services companies.

Conservatism

“I think at this stage of the cycle, prudence and conservatism is called for,” Guloien said.

Manulife has reported just $1.7 billion in credit losses and other costs since 2007, a fraction of the $246.6 billion recorded by insurers worldwide, according to Bloomberg data.

“I think the prudence our grandmothers had, the prudence farmers have in the Midwest; a little more of that needs to be applied in the executive suite,” Guloien said.

D’Alessandro said last year that Guloien may have been chosen by Manulife’s board because of his experience in risk management.

“Don’s most important characteristic for me is that he just seems to be blunt and a straight shooter,” said Mario Mendonca, an analyst at Genuity Capital Markets in Toronto. “And he doesn’t seem to want to sugarcoat anything.”

To contact the reporter on this story: Sean B. Pasternak in Toronto at spasternak@bloomberg.net.

Last Updated: October 1, 2009 16:23 EDT