Manulife Financial Corporation (NYSE: ) surprised the investing world last week by cutting its dividend by 50% in order to use the money saved to build 'fortress levels of capital.' Given that this dividend cut caught most people by surprise, commentators began to raise a whole series of other questions. Specifically, some speculated that Manulife’s move could signal another round of dividend cuts as it becomes clearer every day that the recovery will be slow and long.

Is this just idle speculation or is there something more to this? Let’s address the dividend cut and its larger implications step-by-step.

Why the dividend cut?

Manulife faces the same issue as all of its financial sector peers. The good times are over. The cheap money is gone and the era of easy double-digit EPS growth are probably a distant memory (as I blogged recently, ROI from the insurance sector in normal times is relatively low). But Manulife’s dividend cut is also company specific.

In simple terms, it used premiums collected from its variable-annuity sales and bet on the market- unhedged- and lost (Canadian Capitalist allowed me to guest post on Manulife’s variable annuity problem last December if you want some more detail).  How badly did it lose? $22.42 billion. In relative terms, this is over 5 years of profit based on Q2 2009 earnings. This figure is the gap between what it has to pay its variable annuity customers and what it has set aside. The gap fluctuates since the better the market does, the less the shortfall since Manulife invested the premium money into the market which leads us to the larger discussion…

What does the dividend cut say about the market in general?

The press release announcing the Q2 results had this interesting tidbit: “our capital planning must anticipate more conservative scenarios than we are experiencing…”

This raises the interesting question- considering how bad the market has been the last 12 months, how much more of a conservative scenario could Manulife be projecting? Are they predicting even worse negative growth?

Before you re-visit buying gold bars again, remember that Manulife has a company specific issue and an industry wide issue. The only way to cover their $22 billion problem is for the markets to get back to the pre- September 2008 levels.